The Markets and Fed Diverge Again
The bull market rally is continuing to run on Thursday, with the S&P 500 poised to set yet another record. Investors see inflation in retreat, even if Fed policymakers don’t quite see it that way.
The Gap Between Investors and the Fed
The divergence between investors and the Federal Reserve is widening again. Following Wednesday’s tepid Consumer Price Index (CPI) report, futures markets have increased the odds of two interest rate cuts this year. This prospect has triggered a buying spree in both stocks and bonds.
Fed's Perspective
Contrary to market sentiment, the Fed’s “dot plot” projection released on Wednesday indicates just one cut this year, down from a previous forecast of three. Policymakers are concerned that inflation remains above their comfort levels, making the Fed more hawkish compared to other central banks, particularly those in Europe, which are expected to reduce borrowing costs several times this year. The White House has largely abandoned hopes for similar moves.
Fed Chair Jay Powell emphasized at Wednesday’s news conference that inflation remains above the central bank’s 2 percent target. He warned that a premature cut could reverse much of the progress made.
Market Sentiment
Investors remain unconvinced. The latest CPI report showed that consumer prices in May rose at their lowest level in three years. Charlie Ripley, an investment strategist at Allianz Investment Management, described the Fed’s forecast for a single cut as overly pessimistic regarding inflation progress.
Bullish Market Trends
The S&P 500 has surged nearly 14 percent this year, far outperforming Wall Street analysts’ expectations, even as more companies report a slowdown in consumer spending.
Economists’ Takeaways from CPI and Fed Reports:
Positive Signs: The headline CPI rose by 3.3 percent annually, remaining flat on a monthly basis. Easing gas, auto, and airfare inflation contributed to this.
Concerns: Housing costs rose 0.4 percent monthly, defying analysts’ expectations for relief.
Future Projections: The Fed forecasts fewer cuts this year but expects four next year. The prime lending rate is predicted to fall to about 2.8 percent by the end of 2026, down from the current 5.25 to 5.5 percent.
Tesla Shareholder Confidence in Musk
Elon Musk predicts that Tesla shareholders will approve his pay package. Musk shared data on X suggesting overwhelming support for his multibillion-dollar compensation plan from 2018, with major shareholders like Vanguard and BlackRock voting in favor. Preliminary vote results will be announced at Tesla's annual meeting today.
U.S. Sanctions on Moscow Amid G7 Summit
The White House has imposed new sanctions on Russia, targeting tech links with China that support Putin’s war efforts. G7 leaders are nearing an agreement on a $50 billion aid package for Ukraine, financed by profit from seized Russian assets.
Terraform Labs Settles with the SEC
Terraform Labs has agreed to pay $4.47 billion to settle the SEC’s lawsuit over its 2022 collapse. The settlement requires Terraform to wind down its business and file for bankruptcy protection.
Oil Market Forecast
The International Energy Agency predicts a global oil glut this decade, with Brent crude prices falling due to expected demand peaking by 2029 and an ongoing surplus of petroleum.
Presidential Candidates and Corporate Support
President Biden and Donald Trump are vying for corporate support as they address the Business Roundtable. Trump promises deregulation and lower taxes, while Biden emphasizes economic growth and industrial policy. Some executives are wary of Biden’s plans to raise corporate taxes, though they acknowledge the overall economic stability under his administration.
European Green Deal Under Threat
The European Parliament election results could endanger the EU’s Green Deal. President Macron warned against choosing between the environment and the economy. Analysts expect the Green Deal to survive, but political uncertainties may reduce Europe’s appeal to ESG investors. Increased military spending due to the Ukraine war might also overshadow environmental priorities.
X Games to Sell Teams
The X Games plans to create and sell eight teams, expecting a $100 million cash infusion. MSP Sports Capital, which bought the competition from ESPN in 2022, aims to capitalize on the X Games' cultural legacy and broadcast deal with ESPN. This model follows the success of Formula 1, although similar efforts in electronic sports have faced challenges.
Key Points Summary:
Market Sentiment vs. Fed: Investors foresee inflation retreating, while the Fed remains cautious.
Bull Market Performance: The S&P 500 continues to rally.
Economic Indicators: Mixed signals from CPI data, with concerns over housing costs.
Corporate Politics: Biden and Trump seek corporate backing with differing economic policies.
Environmental Policy: EU’s Green Deal faces political challenges.
Sports Investments: X Games sells teams, inspired by the success of Formula 1.
source:https://www.nytimes.com/2024/06/13/business/dealbook/markets-record-fed-inflation.html
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