It may not be cloud cars or desert skiffs, but the FAA has some pretty bold plans that could soon bring Star Wars to life. According to an updated operational blueprint released by the agency, changes to airspace procedures would be made to accommodate flying taxis and new innovative aircraft. Other considerations to take into account include vertiports, existing infrastructure, travel routes and air traffic communication, which will all help usher in the next era of aviation.

What will the industry look like in 10 years? “I expect that we have air taxis at scale, especially in all of our major cities,” Acting FAA Administrator Billy Nolen said at The Wall Street Journal’s Future of Everything Festival. “If we’ve gotten it right from the regulatory framework, from the level of safety that the public expects, and if all that comes together, then it’s a world that we only thought about as science fiction before that becomes science fact in the moment.”

Traditional plane makers, like Airbus (OTCPK:EADSY) and Boeing (BA), as well as commercial carriers like American Airlines (AAL), Delta (DAL) and United (UAL), are pouring millions into the flying taxis, eVTOL prototypes and transportation partnerships. They are betting that the sector will one day shuttle passengers between airports and city centers, and could even help the airlines reach carbon-neutral targets. Other air mobility firms with skin in the game include Archer Aviation (NYSE:ACHR), Eve Air Mobility (NYSE:EVEX), Joby Aviation (NYSE:JOBY), Lilium (NASDAQ:LILM), Vertical Aerospace (NYSE:EVTL).

In a galaxy far, far way? The FAA expects to grant approval to the first air taxis as soon as next year, but it won’t be easy becoming the chosen one. Prototypes in development will have to pass safety approvals, operating guidelines, and airspace integration, while the flying public will have to embrace them as a safe alternative. The industry might also have to scale to make the price point affordable, and may eventually turn to pilot automation, with humans on the ground monitoring operations. “One risk, I am seeing with coverage of Urban Air Mobility or eVTOL names is that the disruptive technology is often equated to value creation while this is not the case,” writes SA Investing Group Leader Dhierin Bechai.

 

Recession Coming?

 

Banks and lenders have been reacting to the fear of bank failure and defensively tightening lending standards, typically a sign of recession.

In the first quarter of this year, 44.8% of banks reported tighter lending.

The problem becomes clear when we look at the percentage of tightening banks relative to the past four U.S. recessions.

In 1990, 2001, 2008, and 2020, bank loan standards soared. And on all four occasions, the spike preceded a recession. Take a look…

 

 

This is a big warning sign of a hard landing… and a possible recession ahead.

 

The Fed

 

The Fed delivered another 25 bps rate hike but hinted at a pause.

 

 

The Fed lifted its benchmark interest rate by another quarter point, its 10th consecutive increase, taking the Fed Funds rate to a range of between 5% and 5.25% while warning that it remains “highly attentive to inflation risks” in the world’s largest economy.

Chairman Jerome Powell told reporters in Washington, however, that while he and his colleagues were still expecting rates to remain elevated over the coming months, changes to the Fed statement — which dropped the phrase “additional policy firming may be appropriate” in favor of “determining the extent to which additional policy firming may be appropriate” — were meaningful.

It is the central bank’s “tightest” lending rate since September 2007 ahead of the great financial crisis and double the previous rate peak of 2019.

This appears to be the end of the road.

The Fed now plans to “closely monitor incoming information and assess the implications for monetary policy.” And like it said in March, it will “take into account the cumulative tightening” when plotting the path forward.

In other words, Jerome Powell and Co. say they will watch what happens next with the economy before doing anything else.

Here is the current tightening cycle compared to some previous ones.

 

 

The market expects no more rate hikes in this cycle.

The market is anticipating approximately 180 basis points of rate reductions from the Federal Reserve in the second half of this year and the first half of next year.

Wells Fargo sees three consecutive quarters of GDP contraction starting in the second half of this year, which will force the Fed to cut rates.

 

 

If the Fed keeps its sole focus on inflation, there are risks… The bond market expects a recession in the second half of this year, and then it predicts that the Fed will start cutting rates in response. But Powell said last Wednesday that he doesn’t expect this scenario…

“The case of avoiding a recession is in my view more likely than that of having a recession. But… I don’t rule that out, either. It’s possible that we will have what I hope would be a mild recession.”

Among other things, there’s also a big fact about self-inflicted rising interest costs on $31.4 trillion in U.S. government debt – a pressure point that still goes largely underreported. In February, the Congressional Budget Office (“CBO”) projected that net interest costs would be $640 billion in 2023… and $1.4 trillion in a decade.

The real fed funds rate is now positive.

 

 

The ISM is signaling lower inflation ahead.

 

 

Yellen said in a public letter to Congress that the U.S. could default on its $31.4 trillion debt as early as June 1, so we also have the debt ceiling debate on radar. It also was the catalyst for President Joe Biden to say.

He’s inviting the four congressional leaders to the White House this coming Monday to start talking.

So, that’s where we are. The bet here is that the outcome will be the same as the past 90 or so times this issue has come up since 1940, including about 20 occasions since 2001… a higher borrowing limit for Uncle Sam, consequences be damned. Invest accordingly.

There’s a tug of war happening now – and likely will happen for years to come – between the inflation-fighting Fed and a freewheeling Congress spending more money. We can’t change the circumstances, but we can do our best to navigate them.

 

US Economy

 

  • Consumer spending was unchanged in March (the market expected a slight decline).
  • Incomes continue to trend higher.
  • The monthly increase in the “supercore” PCE inflation was the lowest in eight months.
  • Apartment market continues to loosen, as vacancies climb. Nonetheless, rents were up again in April.
  • Economic sentiment has been sour, diverging from concrete improvements in underlying data.

 

 

  • US manufacturing activity continued to contract in April, but the pace of declines eased slightly.
  • Manufacturing demand keeps weakening.
  • Manufacturers now perceive customers’ inventory levels as increasing.
  • After three months of declines, construction spending increased in March.
  • New home listings are down 22.4% vs. 2022.

 

 

  • Here is the biggest positive for the markets – The fiscal policy drag that has been slowing the economy is about to disappear.
  • The federal government missed out on locking in low long-term rates in recent years, causing interest payments to surge.

 

 

  • A 25 bps Fed rate hike this week is baked in. The US central bank is likely to pause from there until the debt ceiling situation is resolved.
  • Job openings declined sharply in March.
  • Here are the quarterly changes in job openings (absolute level and percentage).

 

 

  • The Treasury bill market is increasingly signaling concerns about a US default this summer.
  • The June 13th T-bill yield jumped by 48 basis points on Tuesday.

 

 

  • The yield curve inverted further.

 

 

  • Companies increasingly mention weak demand on earnings calls.

 

 

  • Small businesses are hiring.
  • The South continues to show job losses.
  • Growth in labor costs remains sticky, with the Q1 unit labor costs topping expectations. This poses a challenge to the Fed’s efforts to control inflation.
  • Wage growth is still too high to support a sustained drop in inflation.
  • Stalled productivity and weak labor force expansion make it hard to grow the economy.

 

 

  • Initial jobless claims remain above last year’s levels but are not surging.
  • But higher layoffs signal an increase ahead for unemployment claims.

 

 

  • The Atlanta Fed’s GDPNow model is tracking Q2 growth at 2.7% (annualized), well above economists’ consensus estimate.

 

Market Data

 

  • The S&P 500 is back at resistance.

 

 

  • Profit margins have been shrinking because of high labor costs.
  • Leading indicators point to further declines in margins (PPI trade services).

 

 

  • Apple’s and Microsoft’s combined weight in the S&P 500 hit a record high.

 

 

  • Equity implied volatility is too low, given elevated credit spreads.

 

Source: @TheTerminal, Bloomberg Finance L.P.

 

  • Market breadth has deteriorated.

 

Source: Goldman Sachs; @carlquintanilla

 

  • Great news! – The 12-month forward earnings expectations jumped.

 

 

  • US crypto mining firms could face a 30% tax on electricity usage.

 

 

  • The latest Barron’s survey of large money managers shows that the Big Money is the 2nd most pessimistic about stocks in the history of the survey.
  • Who has the largest lithium reserves?

 

 

  • The Federal Reserve may not begin cutting rates for some time. In light of this, it’s worth asking whether the recent stock market rally is overdone.

 

 

  • Where do JP Morgan’s clients see the S&P 500 at the end of the year?

 

 

  • The market is entering a seasonally weaker period, typically spanning from May to October.

 

 

Quote of the Week

 

“The best and most beautiful things in the world cannot be seen or even touched – they must be felt with the heart.” – Helen Keller

 

Picture of the Week- Two below

 

US beer purchases:

 

 

Months to reach 100 million users:

 

 

 

All content is the opinion of Brian Decker