July 27, 2023

Fed Raises Interest Rates to 22-Year High

📰 News Organizations

  • Fed Raises Interest Rates to 22-Year High. The unanimous decision to raise the benchmark federal funds rate to a range between 5.25% and 5.5% ended a brief pause in rate increases last month. During a press conference, Chairman Jerome Powell said inflation has moderated somewhat since the middle of last year, but hitting the Fed’s 2% growth target “has a long way to go.”

  • Google and Microsoft Report Strong Q2 Results. The two tech giants reported strong results for the June-ended quarter, driven by improved revenue growth and cost reductions. While Google's core advertising business rebounded, Microsoft's cloud and enterprise software businesses exceeded Wall Street's expectations, although the latter's stock slipped over 3% after-hours as its projected revenue for the September quarter fell slightly below estimates.

  • Meta Shares Climb After Revenue, Forecast Beat Estimates. Meta Platforms Inc. topped forecasts for second-quarter sales and gave a rosy outlook for the current period. Second-quarter revenue was $32 billion, compared with analysts’ average projections for $31.1 billion. Meta said sales in the current quarter will be $32 billion to $34.5 billion, also topping average estimates.

  • Snap Beats Revenue Expectations, Reports Narrowed Loss in Q2. Snap's second-quarter sales slightly declined by 4% from the previous year but surpassed analyst expectations at $1.1 billion. The company's net loss in the quarter decreased over 10% year-on-year to $377 million, indicating progress amid retooling efforts in its ad business.

  • Coca-Cola Raises Full-Year Outlook as Q2 Earnings Exceed Estimates. Coca-Cola's second-quarter earnings and revenue exceeded Wall Street's estimates, prompting the company to raise its full-year outlook. The beverage giant's decision to raise prices across its portfolio, including additional hikes in the first quarter, has contributed to its positive performance.

  • Boeing Surpasses Cash Flow Expectations in Q2 with Surging Jet Deliveries. Boeing generated $2.58 billion in free cash flow during the second quarter, surpassing expectations due to a high number of jet deliveries and customer deposits, which offset the impact of supplier disruptions. Analysts had initially predicted a cash burn of nearly $74 million for the aircraft manufacturer.

🐦 Twitter

  • Spreads on US high-yield bonds are the lowest since April 2022. Financial conditions are loosening at a fairly steady clip, even as the Fed prepares to hike rates to the highest level since 2001. Source.

  • The market seems to be over its preoccupation with the Fed, no longer pricing itself off the Fed cycle. Instead, it’s pricing in an anticipated earnings recovery. If earnings growth reverts to its historical trend of 6%, at an equity risk premium of 4.2% the market is fairly valued at 20x. Source.

  • Energy companies just reported the steepest decline in operating rigs in 3 years. The lack of urgency among these businesses to boost production is paving the way for another strong rally in oil and gas prices, ultimately creating further upward pressure on inflation. Source.

  • U.S. office market with most net absorption in four quarters ending June 2023 was Midtown Manhattan (at 3.3 million square feet); in % terms, area came in seventh place behind cities like Brooklyn, Nashville, Jacksonville, and Memphis. Source.

  • The US Money Supply increased in June for the second month in a row, following a record streak of 9 consecutive monthly declines. Still down 3.6% year-over-year but perhaps this is signaling a change in trend. Source.

  • If markets are strong, home prices and commodity prices are rising again, and the labor market is reaccelerating, it’s hard to feel too confident that the inflation fight is over even if auto/shelter dynamics are encouraging. Source.

Trying to time investment decisions around recessions is perilous—you have to know when the recession will start, how long it will last, how deep it will be, and how much is priced in by the markets. That's a lot of guessing, and history offers no consistent patterns.

Jurrien Timmer

📓 Online Publications

  • New Home Sales decrease to 697,000 Annual Rate in June. Sales of new single‐family houses in June 2023 were at a seasonally adjusted annual rate of 697,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 2.5 percent below the revised May rate of 715,000, but is 23.8 percent above the June 2022 estimate of 563,000.

  • CoStar Posts Profitable Q2 As Real Estate Portals Tally Record Traffic. The commercial and would-be residential giant saw revenue jump 13% year over year in the second quarter while profit climbed 20%, according to a 2Q earnings call Tuesday afternoon. This comes as CoStar shifts its focus to its residential brands.

  • A Textbook Non-Recessionary Bear Market. The recent bear market was a textbook example of a non-recessionary bear market caused by a number of factors, including rising interest rates, inflation, and the war in Ukraine. The S&P 500 remains 2-3% from all-time highs on a total return basis so we can probably look at the average time to breakeven for this bear market as well.

  • The Federal Reserve's 2% Inflation Target is Silly, Says Barry Ritholtz. It encourages central banks to keep interest rates too low for too long. This can lead to asset bubbles and financial instability, as seen in the lead-up to the 2008 financial crisis. He thinks a better inflation target would be 3%-4%, which would allow central banks to keep interest rates more neutral and prevent asset bubbles from forming.

  • Nvidia Branches Out Into Cloud Software. Nvidia announced that its DGX Cloud AI training service is now available. Cloud infrastructure companies are all scrambling to buy as many AI training chips as they can get their hands on. But Nvidia has a new way to access its hardware that makes AI easier and more affordable to train than ever before with the DGX Cloud.

🎧 Podcasts

  • IMF Upgrades Forecasts But Warns Global Economy. The future of the global economy is looking a little brighter than it did a few months ago. That’s what the International Monetary Fund said when it released a new forecast. The economy more broadly has shown resilience. But FT's Colby Smith says the economy might not yet be feeling the full effects of aggressive interest rate rises. Source(1:30)

  • US Regional Lenders PacWest And Banc Of California Agree On Merger. California-based PacWest agreed to merge with the Bank of California. PacWest was one of the lenders hit hardest by deposit outflows after Silicon Valley Bank collapsed in March. Customers got spooked because of the similarities between the two of them. They both had close ties to the tech industry and a large amount of uninsured deposits. Source(3:57)

  • UPS and Teamsters Reach Deal. The odds of a crippling strike at delivery giant UPS fell dramatically when the Teamsters union and the company announced they had reached a deal on a new contract. The development came soon after the two sides returned to the bargaining table Tuesday morning. Now, union members need to ratify the deal. Source(7:30)

  • A Coming Upside Surprise in Inflation Data. While many believe inflation will be tamed, the Federal Reserve's hawkish stance on rate hikes and executive orders impacting U.S. drilling and fossil fuel prices keep uncertainty alive, says Tony Greer. He anticipates an upside surprise in inflation data, which could trigger a bond market sell-off and a spike in rates, especially with the expected increase in fuel prices for July. Source(17:20)