Markets rise cautiously as central bankers talk of more hikes

Dow went up 185 after GDP data surprised, advancers over decliners about 2-1 & NAZ gained 19.  The MLP index rose 1+ to the 228s & the REIT index slid back to the 367s.  Junk bond funds inched higher & Treasuries saw heavy selling with the yield on the 10 year Treasury jumping 12 basis points to 3.84% (more below).  Oil climbed to go over 70 & gold was off 2 to 1919.

AMJ (Alerian MLP Index tracking fund)

 

 

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The US economy showed much stronger-than-expected growth in Q1 than previously thought, according to a big upward revision from the Commerce Dept.  GDP increased at a 2% annualized pace for the Jan-thru-Mar period, up from the previous estimate of 1.3% & ahead of the 1.4% forecast.  This was the 3rd & final estimate for Q1 GDP.  The growth rate was 2.6% in the 4th qtr.  The upward revision helps undercut widespread expectations that the US is heading toward a recession.  According to a summary from the Bureau of Economic Analysis, the change came in large part because both consumer expenditures & exports were stronger than previously thought.  Consumer spending, as gauged by personal consumption expenditures, rose 4.2%, the highest quarterly pace since Q2-2021.  At the same time, exports rose 7.8% after falling 3.7% in Q4-2022.  An 8.7% boost in the Social Security cost-of-living adjustment may have boosted the consumer spending numbers.  There also was some good news on the inflation front.  Core PCE prices, which exclude food & energy, rose 4.9% in the period, a downward revision of 0.1 percentage point.  The all-times price index increased 3.8%, unchanged from the last estimate.

First-quarter economic growth was actually 2%, up from 1.3% first reported in major GDP revision

All 23 of the US banks included in the Federal Reserve's annual stress test weathered a severe recession scenario while continuing to lend to consumers & corps, the regulator said.  The banks were able to maintain minimum capital levels, despite $541B in projected losses for the group, while continuing to provide credit to the economy in the hypothetical recession, the Fed said.  Begun in the aftermath of the 2008 financial crisis, which was caused in part by irresponsible banks, the Fed's annual stress test dictates how much capital the industry can return to shareholders via buybacks and divs.  In this year's exam, the banks underwent a “severe global recession” with unemployment surging to 10%, a 40% decline in commercial real estate values & a 38% drop in housing prices.  Banks are the focus of heightened scrutiny in the weeks following the collapse of 3 midsized banks earlier this year.  But smaller banks avoid the Fed's test entirely, which examines the giants.  As a result, clearing the stress test hurdle isn't the “all clear” signal its been in previous years.  Still expected in coming months are increased regulations on regional banks because of the recent failures, as well as tighter intl standards likely to boost capital requirements for the country's largest banks.  “Today’s results confirm that the banking system remains strong and resilient,” Michael Barr, vice chair for supervision at the Fed, said in the release.  “At the same time, this stress test is only one way to measure that strength. We should remain humble about how risks can arise and continue our work to ensure that banks are resilient to a range of economic scenarios, market shocks, and other stresses.”  The group of banks saw their total capital levels drop from 12.4% to 10.1% during the hypothetical recession.  But that average obscured larger hits to capital, which provides a cushion for loan losses, seen at banks that have greater exposure to commercial real estate & credit-card loans.  As a result, regional banks had the lowest capital levels in the exam, hovering between 6% & 8%.

Federal Reserve says 23 biggest banks weathered severe recession scenario in annual stress test

Treasury yields climbed after the gov said GDP grew more than expected in the first qtr, signaling that the US economy may be farther from a recession than previously feared.  The yield on the 10-year Treasury was last up by over 11 basis points to 3.829%, while the 2-year Treasury jumped 16 basis points to 4.884%.  Yields & prices move in opposite directions & 1 basis point equals 0.01%.  Revised data showed GDP increase at a 2% annualized rate in Q1, up from a previous estimate of 1.3% & the figure was also ahead of the 1.4% forecast.  Weekly jobless claims offered another hint of good news for the state of the economy.  Claims fell to 239K, the lowest level since May, & below the 264K expected.  Elsewhere, investors weighed the outlook for interest rates after Fed Chair Powell said yesterday that policymakers are expecting further restriction.  His recent remarks suggested that inflation is still running too high & rates needed to go higher in order for it to come back down.  Powell also said that he expects it to take ‘a good while’ for low inflation to return & price increases to revert to the Fed’s 2% target.

Treasury yields jump after major GDP upward revision, strong jobs data

Powell is still talking about higher interest rates & today's data should not change his thoughts.  Also, while showing improvement, the growth rate at 2% is below higher rates when the economy is truly strong.

Dow Jones Industrials

 

Markets hesitate while traders weigh new Powell comments

Dow gave back 74, advancers slightly ahead of decliners & NAZ edged up 36.  The MLP index added 1+ to the 226s & the REIT index slid back fractionally to the 366s.  Junk bond funds crawled higher & Treasuries were purchased which reduced yields.  Oil bounced back 1+ to the 69s & gold was off 2 to 1921 (more on both below).

AMJ (Alerian MLP Index tracking fund)

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Flight disruptions mounted as severe storms & staffing issues kicked off a rocky start to summer.  More than 7700 flights U.S. flights were delayed today & nearly 2200 were canceled, FlightAware data showed, as thunderstorms that derailed thousands of trips over the weekend lingered in airspace that is heavily congested on a clear-weather day.  That's on top of more than 8800 US delays & close to 2250 cancellations yesterday.  The Federal Aviation Administration paused flights bound for New York's LaGuardia Airport, JFK Intl Airport & Newark Liberty Intl Airport in NJ.  Delays were averaging 3 hours or longer at those airports.  The FAA said that the thunderstorms were blocking arrival & departure routes.  The disruptions come ahead of the busy Fourth of July holiday travel period, when Ms are expected to fly.  The Transportation Security Administration said it could screen more travelers than in 2019, before the pandemic, raising competition for spare seats.  The Biden administration has pressured airlines to improve their operations after widespread flight disruptions last spring & summer, which prompted carriers to trim their overambitious schedules.  But the industry struggled to recover this past weekend from a series of thunderstorms that didn't let up for days.  Thunderstorms are difficult for airlines because they can form with less warning than other major weather obstacles like winter storms or hurricanes.  Rolling delays could force crews to reach federally mandated workday limits & further worsen disruptions.  About 30K flights have arrived late since Sat, FlightAware data showed, with cancellation rates from Sat-Mon up more than 3 times the average for the year.  Some airline execs have also blamed some of the disruptions on shortages of air traffic controllers.

Severe weather, FAA shortfalls kick off rocky start to summer air travel

Mortgage rates turned higher again last week.  But the increase did not cut into mortgage demand, as buyers sought newly built homes.  Total mortgage application volume rose 3% compared with the previous week, according to the Mortgage Bankers Association's (MBA) seasonally adjusted index.  An additional adjustment was made for the Juneteenth holiday.  Applications for a mortgage to purchase a home rose 3% for the week but were 21% lower year over year.  These applications have increased for 3 straight weeks to the highest level since early May, despite still-high mortgage rates.  “New home sales have been driving purchase activity in recent months as buyers look for options beyond the existing-home market,” said Joel Kan, MBA's VP & deputy chief economist.  “Existing-home sales continued to be held back by a lack of for-sale inventory as many potential sellers are holding on to their lower-rate mortgages.”  Sales of newly built homes in May soared 12% compared with Apr & were 20% higher than May 2022, according to the US Census.  Builders are driving demand in part by offering incentives, like paying down mortgage rates.  Last week the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726K or less) increased to 6.75% from 6.73%, with points remaining at 0.64 (including the origination fee) for loans with a 20% down payment.  The average rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $726K) rose more sharply to 6.91% from 6.80%.  “The spread between the jumbo and conforming rates widened to 16 basis points, the third week in a row that the jumbo rate was higher than the conforming rate,” Kan said.  “To put this into perspective, from May 2022 to May 2023, the jumbo rate averaged around 30 basis points less than the conforming rate.”

Mortgage demand grows, driven by sales of new homes

Amazon (AMZN) will boost its data center operations in Ohio as part of a massive new investment in the Midwestern state by the company's cloud-computing segment.  The estimated $7.8B investment from Amazon Web Services (AWS) will go toward new data centers with "computer servers, data storage drives, networking equipment and other forms of technology infrastructure used to power cloud computing," according to Ohio Gov Mike DeWine's office.  It will do so before the start of 2030.  AMZN said it has previously invested in state in the past 7 years, bringing the total to a projected $14B.  The governor's office said where the upcoming data centers will be constructed will be revealed "at a later date" once AMZN chooses from the numerous sites in central Ohio it has been considering.  Franklin & Licking counties are home to existing AMZN data center campuses.  The governor’s office said where the upcoming data centers will be constructed will be revealed "at a later date" once AMZN chooses from the numerous sites in central Ohio.  AWS’s workforce in Ohio last year included nearly 1000 direct employees.  In Apr, as AMZN reported over 1.4M people worked either full-time or part-time for the company across the globe.  For the qtr, its net sales came were $122.5B, roughly $21.3B of which came from AWS.  Net income was $3.7B.  AWS saw $80.1B in net sales in 2022, marking a nearly 29% increase from the prior year.  The stock was down pennies.
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Amazon announces massive $7.8 billion investment in red state

Gold futures declined to mark their lowest finish since mid-Mar.  Essentially, the only thing moving the gold market has been Fed rhetoric & actions.  However, US interest rates nearing their peak & gold may start discounting the next big event, which could take gold to higher levels.  Gold for Aug declined by $1 to settle at $1922 an ounce, the lowest most-active contract finish since Mar 14.

Gold futures settle at lowest since mid-March

Oil futures finished higher after the Energy Information Administration reported that US crude supplies fell by nearly 10M barrels last week.  There are relatively few positive drivers for oil at the current time, including the 9.6M-barrel weekly draw in US crude supplies reported by the EIA.  However, the prospect of higher interest rates going forward appears to be the foremost concern for now as higher rates could lead to a recession.  Aug West Texas Intermediate crude gained $1.86 (2.8%) to settle at $69.56 a barrel.

Oil futures settle higher after U.S. data show a weekly drop in supplies

Powell's words & actions are driving the stock market.  As a result, the Dow will likely continue to drift sideways as is has for months.

Dow Jones Industrials 

Markets fall as Powell says hikes at consecutive meetings are possible

Dow slipped back 163, decliners over advancers 5-4 & NAZ went up 49.  The MLP index remained steady in the 224s & the REIT index was about even in the 367s.  Junk bond funds fluctuated & Treasuries had limited buying, reducing yields slightly (more below).  Oil bounced back to the 68s & gold was off 7 to 1916.

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Federal Reserve Chair Jerome Powell talked tough on inflation again, saying at a forum that he expects multiple interest rate increases ahead & possibly at an aggressive pace.  “We believe there’s more restriction coming,” Powell said.  “What’s really driving it ... is a very strong labor market.”  The comments reiterate a position taken by Powell's fellow policymakers at their Jun meeting, during which they indicated the likelihood of another ½ percentage point of increases thru the end of 2023.  Assuming a ¼-point per meeting, that would mean 2 more increases.  Previous comments from Powell pointed to a possibility of the hikes coming at alternate meetings, though he said today that might not be the case depending on how the data come in.  The Fed hiked at each meeting since Mar 2022, a span that included 4 straight 3-qtr point moves, before taking a break in Jun.  “I wouldn’t take, you know, moving at consecutive meetings off the table,” he added.  Central to the Fed's current thinking is the belief that the 10 straight rate hikes haven't had time to work their way thru the economy.  Therefore, officials can't be sure whether policy meets the “sufficiently restrictive” standard to bring inflation down to the Fed's 2% target.  Most economists think the rate hikes ultimately will pull the US into at least a shallow recession.  “There’s a significant possibility that there will be a downturn,” Powell said, adding that it’s not “the most likely case, but it’s certainly possible.”

Powell says more ‘restriction’ is coming, including possibility of hikes at consecutive meetings

Drugmakers are jockeying to capitalize on the next major innovation coming to the blockbuster weight loss industry: effective, convenient & potentially affordable obesity pills.  An estimated 40% of US adults are obese, making a successful pill a massive opportunity.  For now, one experimental oral drug from Eli Lilly (LLY) appears to have an edge over pills from Novo Nordisk (NVO) & Pfizer (PFE) – even though it may not win US approval first.  All 3 manufacturers are developing oral versions of GLP-1s, a class of drug that mimics a hormone produced in the gut to suppress a person's appetite.  Novo Nordisk’s popular Wegovy & Ozempic treatments, which sparked a weight loss industry gold rush last year, are weekly GLP-1 injections also known as semaglutide.  The pills are easier to manufacture than injections, which come in the form of single-use pens.  That means the oral drugs could potentially help alleviate the supply shortages plaguing their injectable counterparts.  Pills are also typically cheaper than injections, though it’s unclear if that will be the case with the obesity pills.  None of the 3 drugmakers have provided estimates for how much the new obesity pills would cost.  But analysts are confident in the competitive edge of orforglipron in the long run, especially after LLY unveiled phase 2 clinical trial results last week that showcased the drug’s strong efficacy profile.  LLY stock fell 1.38.
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As drugmakers race to develop the next big weight loss pill, Eli Lilly may have an edge

Treasury yields fell as investors considered the path ahead for interest rates & awaited fresh comments from Federal Reserve Chair Jerome Powell at the ECB Forum on Central Banking today (see above).  The 10-year Treasury yield was down about 2 basis points at 3.75% & the 2-year Treasury yield was last trading at 4.747% after falling by nearly 2 basis points.  Yields & prices have an inverted relationship & one basis point equals 0.01%.  Chiefs from the Bank of England, European Central Bank & Bank of Japan will join Powell.  Investors are hoping to gain fresh insights into what policymakers expect for interest rates & inflation going forward.  The central banks have taken varying approaches to their interest rate policies recently.  The Fed & Bank of Japan chose to keep rates steady, while the Bank of England & ECB increased interest rates by 50 & 25 basis points respectively.  Powell has recently indicated that further interest rate hikes are expected in the US as the central bank's policy goals of easing the economy & cooling inflation have not yet been fully reached.  This comes as economic data has reflected resilience in the economy & has prompted markets to price in another rate hike when the Fed meets in Jul.

Treasury yields dip as investors weigh interest rate outlook

The stock market keeps churning, waiting for significant news on the status of the economy.  Powell continues with his message that more rate hikes may be coming.

Dow Jones Industrials