Kamis, 11 Juli 2024

Rate Cut Fever: Will the Fed Pull the Trigger?

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Rate Cut Fever: Will the Fed Pull the Trigger?

Plus: Inflation Cools, Real Estate Booms, Banking Shock Looms and China Steps In.

Josh Belanger

Jul 12

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Good evening! Today was one of those "sell the news, buy the rumor" days on the June inflation report.

With yesterday's rally pushing the S&P 500 to new highs, today's news erased those gains. Wall Street has been giddy for months, creating a bubbly market.

Traders are now buzzing about a potential rate cut starting in September. The road is now open to a rate cut.

Inflation Cools, Rate Cuts Loom: Fed Ready to Slash Rates

Summary: US inflation cooled in June, marking the slowest pace since 2021, driven by a slowdown in housing costs. This strengthens the case for the Federal Reserve to cut interest rates soon.

Details:
- Core CPI: Excluding food and energy, climbed 0.1% from May, the smallest advance in three years.
- Overall CPI: Fell for the first time since the pandemic, pulled down by cheaper gasoline.
- Shelter Prices: Climbed 0.2%, the smallest gain since August 2021.

Why it matters: The slowdown in inflation, particularly in housing, provides the Fed with confidence to potentially cut rates, likely starting in September. Traders have already started pricing in these expected rate cuts.

Real Estate Stocks Skyrocket: Best Day of the Year!

Summary: Real estate stocks had their best day of 2024, spurred by cooler-than-expected inflation data, which boosted hopes for rate cuts starting in September.

Details:
- Market Movement: Real estate shares jumped 2.7%, the highest since March.
- Volume: Trading volume was 30% higher than the 30-day average.
- Homebuilders: Shares of D.R. Horton Inc. gained 7.3%.

Why it matters: Real estate stocks, which have struggled this year, provide good buying opportunities for investors looking for better-than-risk-free returns. The cooling inflation supports the outlook for a rate cut, which is positive for the real estate sector.

China’s Bond Market Meltdown

Summary: The People’s Bank of China (PBoC) is preparing for its first direct market intervention in decades to address the bubble forming in the sovereign bond market.

Details:
- Action Taken: PBoC struck deals to borrow several hundred billion renminbi of long-dated bonds.
- Goal: To slow the rush of money into sovereign bonds and stabilize yields.
- Market Impact: Yields on 10-year debt rose from an all-time low of 2.18% to above 2.3%.

Why it matters: The PBoC’s intervention aims to prevent a potential crisis similar to the collapse of Silicon Valley Bank. This move indicates the central bank's commitment to managing the bond market amidst a struggling economy and flagging equity markets.

Big Banks Brace for Earnings Shock: Is the Banking System Cracking?

Summary: The country’s biggest banks, including JPMorgan Chase, Citigroup, and Wells Fargo, are set to report quarterly earnings this Friday. Investors are on high alert for signs of banking system weakness, the effects of persistent high interest rates, and cracks in consumer finances.

Details:
- Unrealized Losses: Banks hold $517B in unrealized losses from low-interest bonds.
- Commercial Real Estate: Rising delinquencies, especially for smaller banks.
- Lending Profits: Growth slowing as funds move to interest-bearing accounts.
- Regional Liquidity: Regional banks have less liquidity than big banks.
- Credit-Card Delinquencies: Increasing delinquencies appearing in earnings.
- Investment Banking Fees: Expected rise as borrowing costs decrease.

Why it matters: Earnings reports will reveal the health of the banking sector and how banks handle high interest rates, real estate pressures, and consumer credit issues.

Quick Hits:

Title Insurance Rip-Off: Homeowners Overpay for Rare Claims: Millions of homeowners pay for costly title insurance during refinances, but claims are exceedingly rare. Fannie Mae tests a pilot program to waive title insurance for low-risk refinances, potentially saving borrowers $500-$1,500 each.
Moderna's Secret Weapon: AI-Powered Biotech Revolution: Flagship Pioneering, the backer of Moderna, raises $3.6 billion to create AI-powered biotech companies focused on drug discovery.
$2.3 Billion AI Bet: Index Ventures Goes All-In: Index Ventures raises over $2 billion to invest in AI-driven innovations, aiming to capitalize on groundbreaking AI advancements across various sectors.
AMD Takes on Nvidia: Buys Finnish AI Start-Up for $665M: AMD acquires Silo AI to expand its AI services and compete with Nvidia. Silo AI specializes in custom large language models.
Germany Bans Huawei: Major 5G Overhaul by 2029: Germany will phase out Huawei and ZTE components from its 5G networks by 2029 to address security concerns and reduce dependence on Chinese technology.
US Slaps Tariffs on Mexico: Stop Sneaky Chinese Metal Imports: The US imposes tariffs on Mexican imports containing Chinese steel and aluminum to prevent duty-free entry and combat tariff circumvention.
Retailers Slash Choices: Leaner Shelves, Bigger Profits: Companies like Hanesbrands and Dollar General cut product choices to trim costs and improve margins, focusing on high-demand items and reducing inventory.

POLL

Do you think the Fed will cut rates in their September meeting?

Yes

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