Week of May 6, 2024 Recap
Fed…
Kashkari on Tues wrote that Fed policy might not be tight enough to constrain housing and therefore inflation.
5/3: Austan Goolsbee - “The more jobs reports you get like this where they’re solid but it’s clearly moving back into something that looks like pre-Covid,” Goolsbee said, “the more confident we can be that the economy is not overheating.” NOTE: Employers added 175,000 jobs in April as the unemployment rate ticked up to 3.9% and wage gains slowed.
5/6: Thomas Barkin (voter) - “I am optimistic that today’s restrictive level of rates can take the edge off demand in order to bring inflation back to our target.” “The full impact of higher rates is yet to come.”
5/7 Kashkari - “ It’s likely the Fed will keep interest rates where they are “for an extended period of time” until officials are certain inflation is on track to their target.”
5/8 Collins - “The recent upward surprises to activity and inflation suggest the likely need to keep policy at its current level until we have greater confidence that inflation is moving sustainably toward 2%.” “Collins, who doesn’t vote on monetary policy this year, said the goal was for labor markets to continue to be healthy, though “moderating in an orderly way” that better aligns labor supply and demand”
5/9 Daly (voter): Reiterates that we are in restrictive territory and it takes time for policy to work. “There’s considerable now uncertainty about what the next few months of inflation will be and what we should do in response.” Daly said she doesn’t see the need for Fed officials to push down the economy to ease inflation further. If the labor market began to weaken then officials could consider lowering rates, she said, though recent softening in the data is normal. “It’s far too early to declare that the labor market is fragile or faltering,” she said. (this confirms my read that labor market is more important than inflation)
News Flow…
77% of China stock revised down 2024 earnings
US Pandemic Savings Have Finally Been Spent, SF Fed Study Says
Michigan sentiment index came in 67.4 down from 77.2
US Jobless rate spikes w/w
180 billion dollars of buy backs for first quarter within the S&P 500 universe.
Outlook and investment thesis has not changed since last week. I continue to believe that rate cut is still probable but the reason for cutting mainly will be driven by macro economic deterioration, ie labor markets. Vital Knowledge summarizes it well:
“It’s pretty clear the next move for the Fed will be a cut, and a resumption of the disinflationary process coupled with a continued pullback in job creation could prompt quick action. However, the ideal scenario for equities is NOT an aggressive and extended cutting campaign but instead a few (1-3) “maintenance cuts” spread out over multiple quarters – the former would mean a deep growth (and thus earnings) shortfall while the latter would suggest a “goldilocks”-like economy, the type of environment ideal for stocks.”
Its interesting to also see buybacks gaining momentum. Its known that companies do see consumer spending cooling a little. Firms had to adjust buy cutting costs (layoffs) and now buybacks to support their companies. These are just various approaches that firms utilize to protect their valuations. They aren’t sustainable in the long term but will smooth volatility q/q. What matters most is consumers at the end of the day.
Geopolitics…
Al Jazeera new office closed in Israel, citing national security
Israel Truce talks broke down on Sunday
Hamas rocket barrage killed 3 IDF soldiers
5/6: Israel asked civilians to move out of Rafah
5/7: Israel started targeted strikes in Rafah
US domestic pressure heating up with university protests
The Israel Hamas war has changed fundamentally as it continues to drag on no with truce in sight. Objectives that were once clear to the Israel and the world are now interwined with various narratives promoted by numerous polticical actors. This is of course no surprise as wars generally start with great rallying and momentum but transforms in to a war of narratives.
The narratives took a very abrupt turn when Israel accidentally killed 7 aid workers early April. It wasn’t long when the Gaza death tally’s started to become front page news where large majority of deaths were women and children. University protests followed and continues to spread across US, Israels biggest supporter.
There was also instability within Israels top ranked officials. An WSJ article mentioned how Netanyahu and Isaels top military commanders have big mistrusts of each other. Scheduling official trips and pressers without each others knowledge. There’s also Chuck’s Schumers call for re-election in Israel. All this shows is a messy leadership and support within and between Isaels and US top commands.
This is not a poltical blog where I rant about the rights and wrongs of various poltitical entities. They are all driven by their own beliefs and ideologies that I don’t and shouldn’t have an opinion on. What I do care about is its impact on the markets.
Israel’s push in to Rafah this week kind of surprises me given the international stance. Markets actually didn’t really reacted the way I expected ether (oil barely moved). This was supposedly initiated by a missile attack that killed 3 IDF soldiers. On the same day, leaflets were dropped to evacuate the 1 million souls stranded in Rafah. As of today, 300k Palestinians have moved out of Rafah. Wall street journal is reporting that Hamas is also making a resurgence in the North.
This is starting to morph in to guerilla warfare where Hamas can easily move within the displaced Palestinians and pop up anywhere to launch surprised attacks. This will increasingly spread IDF forces thin as it trys to cover more ground.
Additionally, I think the market has built up some tolerance for the crease fire talks which have been on and off for weeks. No major breakthrough is in sight and I think this conflict might drag on for a lot longer unless there is a shakeup of Israel leadership OR US intervwines in some form.
Oh by the way, don’t forget about Ukraine. Putin seems to be playing with nucs..