Stocks hit a wall yesterday as investors remembered all that is wrong in the world… of economics. Bond yields decline as fearful investors move into safer investments – like the olden days.
When the music’s over, turn out the lights. What were we thinking? There is some sort of refreshing naivete in stock traders sometimes, not unlike a cute, unknowing child playing with a hand grenade. Indeed, it has been refreshing for the past couple of weeks during which nothing seemed to slow down the bulls… nothing. Now, to be fair, the economy seems to be resilient for now, at least, a broader banking crisis has been averted, inflation seems to be slowly trending downward… and WE JUST GOT THROUGH A PANDEMIC, so I suppose there are reasons to be somewhat jovial. All that is relative, unfortunately. When you back away and look at the situation, it can be a bit daunting.
Leave it to the Kiwis to send us a reminder. New Zealand’s central bank came out with some bite behind the country’s famous Haka and raised its key lending rate more than expected WHILE YOU SLEPT. Oh yeah inflation, and those angry central bankers. Inflation has, indeed, calmed down a bit, but we know that it is far from normal. Do you know what economists fear most when it comes to inflation? Acceptance. When consumers grow to expect inflation and go about business as usual, inflation becomes more persistent. Economics relies on consumers to simply stop buying things that are too expensive. That forces suppliers… who want to sell us stuff… to lower prices, and at the end of the day, an equilibrium is found. But that has not been happening as consumers will simply not stop consuming. That is good for the economy but bad for inflation. That is why central bankers, whose job it is to keep inflation in check, will simply not back down from their assault. Just yesterday, rhetoric from US Fed members was quite clear that rates must remain high to fight persistent inflation. Do you know what the best inflation fighter is? Sorry to say, it is recession. So, when the Fed members say, “whatever it takes,” you know what they mean.
Yesterday’s JOLTS Job Openings came in lower than expected, which is proof that the Fed’s good work has been effective. Additionally, Factory Orders fell more than expected. These things point to slower economic growth, but it’s not clear if they point to lower inflation. This morning, we will get another read on the labor market with the release of ADP Employment Change. We will also get ISM Services PMI which will give us a pulse on the services sector, currently the biggest driver of inflation. Finally, on Friday, with markets closed, the Government will release its monthly employment figures which are expected to show a further slowing in hiring, something that the Fed has said that it would very much like to see. Has the boat turned around, and more importantly, can it stop in time to avoid crashing into the dock?
WHAT’S SHAKIN’ THIS MORNIN’
FedEx Corp (FDX) shares are higher by +3.03% in the premarket after the company announced that it will consolidate 3 of the company’s largest divisions into 1 for operating efficiency. Good, news, but the great news is that the board raised the company’s dividend. The company raised its full-year guidance last month and it will announce its Q1 earnings in mid-June. Dividend yield: 2.22%. Potential average analyst target upside: +6.6%.
NVIDIA Corp (NVDA) shares are lower by -1.98% in the premarket after a new set of Japanese restrictions on China were announced. The US has already placed heavy limitations on semiconductor production in China and this latest move by Japan has drawn additional Chinese criticism hinting at larger, drawn-out trade tensions. NVIDIA will announce its Q1 earnings next month. Dividend yield: 0.58%. Potential average analyst target upside: +1.4%.
YESTERDAY’S MARKETS
Stocks declined yesterday as on-going fears of inflation and the banking system stirred fear in investors. The S&P500 slipped by -0.58%, the Dow Jones Industrial Average fell by -0.59%, the Nasdaq Composite Index traded lower by -0.52%, and the Russell 2000 Index dropped by -1.81%. Bonds gained and 10-year Treasury Note yields fell by -7 basis points to 3.33%. Cryptos gained +1.27% and Bitcoin added +2.43%.
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