Bloomberg’s latest Fed Minutes Sentiment Indicator was roughly neutral, but some language in the minutes is hawkish, as seen in the broader Fed sentiment index.

The FOMC shows unease over the inadequate progress in controlling inflation.

Participants observed that while inflation had eased over the past year, in recent months there had been a lack of further progress toward the Committee’s 2 percent objective. The recent monthly data had showed significant increases in components of both goods and services price inflation. In particular, inflation for core services excluding housing had moved up in the first quarter compared with the fourth quarter of last year, and prices of core goods posted their first three-month increase in several months.

  • Some FOMC members remain concerned that current high interest rates may not be sufficiently restrictive. The possibility of higher long-run equilibrium interest rates and lower potential output suggests that more aggressive policy measures may be required to control inflation.

These participants saw this uncertainty as coming from the possibility that high interest rates may be having smaller effects than in the past, that longer-run equilibrium interest rates may be higher than previously thought, or that the level of potential output may be lower than estimated.

  • FOMC members continue to communicate their willingness to keep rates ‘higher for longer’ or even raise rates if inflation worsens. It should be noted that these statements were made before the release of the April CPI report, which was more ‘benign’ than the market had feared.

Participants discussed maintaining the current restrictive policy stance for longer should inflation not show signs of moving sustainably toward 2 percent or reducing policy restraint in the event of an unexpected weakening in labor market conditions. Various participants mentioned a  willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate.

The US dollar jumped in response to the FOMC minutes.

Stocks declined, and precious metals dropped.

 

US Economy

 

  • Housing starts and building permits were above last year’s levels in April, supported by single-family construction.
  • Builders are increasingly focused on rental units.
  • Active listings are well below pre-pandemic levels in most metro areas.

 

 

  • But existing home inventories are now above last year’s levels.

 

 

  • More sellers are forced to cut prices to attract buyers.

 

Source: Redfin

 

  • Housing demand has softened further this year.

 

Source: Redfin

 

  • Mortgage originations for households with credit scores below 760 reached a multi-year low in the first quarter.
  • The Conference Board’s US leading index declined again last month.
  • Based on historical precedent, the 6-month changes in the leading index suggest that the economy should be in recession.

 

 

  • The market does not anticipate either a recession or a rebound in inflation.
  • Total tax receipts as a percent of GDP are now at the low end of the historical range.

 

Source: Gavekal Research

 

  • The Philly Fed’s index shows that service sector sales continued to expand modestly this month.
  • Historically, when oil and gold prices have exceeded their median levels, producer price inflation has shown marked increases in the following years.

 

Source: Barron’s   Read full article

 

  • Fewer firms are citing inflation on earnings calls.
  • Investors expect the Fed to deliver the first rate cut in the second half of the year.
  • There has been a widening gap in living standards between higher and lower income groups.

 

Source: Gavekal Research

 

  • The largest tech firms’ CapEx is increasingly dominated by spending on servers.

 

Market Data

 

  • Share buyback announcements are up sharply.

 

Source: Goldman Sachs; @MikeZaccardi

 

  • And yet, companies known for share buybacks have been underperforming
  • The valuation gap between US shares and those in the rest of the world continues to widen.

 

Source: @TheTerminal, Bloomberg Finance L.P.

 

  • A number of sell-side analysts are bullish, ..

 

Source: Yahoo Finance   Read full article

 

  • ……..but current prices are well above the average year-end forecast.
  • The S&P 500 long-term P/E ratio is back above 30x.

 

 

  • Boeing:

 

 

  • The market is now pricing only 34 bps of Fed rate cuts this year, weighing on stocks.

 

Great Quotes

 

“There comes a point where we need to just stop pulling people out of the river.  We need to go upstream and find out why they are falling in.” – Bishop Desmond Tutu

 

Picture of the Week

 

 

 

All content is the opinion of Brian Decker