Month: June 2024

Investing.com — Many on Wall Street have given up hope for sooner rate cuts, but one analysts is bucking the trend and continues to bet on a rate cut as soon as July. 

“Futures markets are pricing in about 3bps of cuts at the 31 July FOMC meeting. We think this is too low. In fact, a July cut is our baseline,” Steve Englander Head, Global G10 FX Research and North America Macro Strategy said in a recent note. 

About 14% of traders expect the Fed to cut rates in July, according to Investing.com’s Fed Rate Monitor Tool, but Englander points to recent slowing in the economy and inflation data that suggest the disinflation trend is alive. 

The latest core PCE data, released Friday, showing inflation slowed more than expected in April from the prior month, and was in-line with estimates on an annualized basis, kept the “disinflation thesis alive,” Englander said, expecting more of the same in the coming months. 

“There are two more PCE releases before the July meeting, so there is considerable room for core PCE to slow,” he added.

The strength in the labor market seen in Q1, however, has often been flagged as a catalyst for consumer spending and a threat to inflation , but Englander believes that a large chunk, or about 46% of the 269,000 average nonfarm payroll gain in Q1 was due to “undocumented immigrants getting employment authorisation.”

On the demand front, meanwhile, data on Friday showing consumer spending weakened in April, added some credence to Englander’s outlook. 

Consumer spending, which makes for more than two-thirds of U.S. economic growth, increased by 0.2% in April, lower than expectations of 0.3%. 

Still, the slew of Fed speak over the past weeks suggest that FOMC members are leaning into the central bank’s higher rates for longer stance. 

“I’m keeping my eyes on the short-run trajectory, and if we can continue to see that trajectory move forward, I think we will be in a good place. I don’t think that’s going to be in July,” Atlanta Federal Reserve President Raphael Bostic said Thursday. 

With its latest earnings report, AI darling NVIDIA Corporation (NASDAQ:NVDA) announced a ten-for-one stock split.  The split, which will be distributed at the close on June 7th, will give shareholders ten shares in exchange for each one share they own as of the June 6th record date.  The stock will start trading split-adjusted at market open on Monday, June 10th. The split raises the very real possibility that NVIDIA will be added to the Dow Jones Industrial Average (DJIA), with chip-laggard Intel Corporation (NASDAQ:INTC) seen as the company it will likely replace.

The Dow is a price-weighted index, meaning stocks with higher prices have a bigger impact on the index.  With NVIDIA’s stock over $1000 per share currently, this would give it too much of a weighting in the index.  However, with the ten-for-one split, the stock price would be closer to the $100 level – making an entry into the Dow more feasible and likely.

The last change for the Dow was in February 2024, when Amazon.com Inc (NASDAQ:AMZN) replaced Walgreens Boots Alliance Inc (NASDAQ:WBA).  In August 2020, Salesforce (NYSE:CRM), Honeywell (NASDAQ:HON), and Amgen (NASDAQ:AMGN) replaced ExxonMobil (NYSE:XOM), Raytheon (NYSE:RTN), and Pfizer (NYSE:PFE). 

When asked to comment on speculation that NVIDIA will soon be added to the Dow, S&P Dow Jones Indices, the firm behind the index, said it does not comment or speculate on index additions or deletions.

However, reading the DJIA methodology language carefully hints that NVIDIA will, in fact, be added, and the announcement can come at any time.

It reads: “While stock selection is not governed by quantitative rules, a stock typically is added only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors. Since the indexes are price weighted, the Index Committee evaluates stock price when considering a company for inclusion. The Index Committee monitors whether the highest-priced stock in the index has a price more than 10 times that of the lowest. Maintaining adequate sector representation within the index is also a consideration in the selection process for the Dow Jones Industrial Average. Companies should be incorporated and headquartered in the U.S., and a plurality of revenues should be derived from the U.S. Changes to the indices are made on an as-needed basis. There is no annual or semi-annual reconstitution. Rather, changes in response to corporate actions and market developments can be made at any time. Constituent changes are typically announced one to five days before they are scheduled to be implemented. At any given time, the constituents of the Dow Jones Industrial Average, Dow Jones Transportation Average and Dow Jones Utility Average make up the Dow Jones Composite Average.” (bolded by Investing.com)

NVIDIA is the third-largest company in the world, with a market value of $2.7 trillion—behind only Microsoft (NASDAQ:MSFT), which has a market value of just over $3 trillion, and Apple (NASDAQ:AAPL), which has a market value of $2.9 trillion. Apple and Microsoft are both in the Dow.

It is the leader in AI, powering applications like ChatGPT, which is expected to be bigger than the Internet.

NVIDIA now dwarfs the once-mighty Intel, which has a market cap of only $128 billion. Intel is the lowest-priced stock in the Dow, and its market cap is near the bottom of the list.

NVIDIA is expected to post revenue of $111.38 billion this year versus $52 billion for Intel.  NVIDIA’s growth is also astonishing versus Intel’s lack of growth.  NVIDIA’s revenue is expected to grow by 83% this year, while Intel’s is expected to fall by 5%.

The inclusion of NVIDIA in the Dow will also be an admission by the DJIA Index Committee that AI is the future of all industries, not just technology.

The US bond market continues its volatile performance in 2024, with Treasury yields recently reaching four-week highs. However, despite near-term strength, UBS strategists believe bond yields are likely to end the year lower, due to several macroeconomic factors.

Primarily, US inflation is among the key catalysts influencing bond yields. According to the latest data from the Federal Housing Finance Agency, US house prices edged up just 0.1% month-over-month in March, down from a 1.2% rise in February. On an annual basis, prices increased by 6.7% in March, compared to 7.1% in February.

According to UBS, the softening housing market and the slowing price trend in new rental leases hint at a further inflation slowdown.

“Hard data continues to suggest that inflation should trend lower for the rest of this year following April’s encouraging print,” they noted.

The Federal Reserve’s monetary policy is another crucial factor that may contribute to a decline in bond yields. While Minneapolis Fed President Neel Kashkari indicated that further rate hikes are not yet ruled out, the overall tone from the Fed remains patient.

Kashkari mentioned that the odds of the Fed raising rates “are quite low,” aligning with recent Fed communications and Chair Jerome Powell’s view that the central bank’s next move is unlikely to be a hike.

“With a softening labor market and slowing economic growth, we continue to expect the Fed to start policy easing in September, with a total of 50 basis points of rate cuts this year,” strategists wrote.

In addition, UBS’s team believes that the pace of the Fed’s balance sheet runoff is set to taper. Starting next month, the Fed will slow its quantitative tightening (QT) efforts, reducing the monthly cap on the sale of US Treasury securities from $60 billion to $25 billion.

This reduction in QT is likely to lower upward pressure on real rates, contributing to a decrease in bond yields.

“We believe this should reduce upward pressure on real rates and drive the next leg lower in yields,” UBS continued.

Also, the growth in the US economy is another factor that will make an impact. As highlighted by UBS, the world’s biggest economy is showing signs of slowing, with a softening labor market and reduced economic momentum, further supporting the case for lower yields as investors seek safer assets amid economic uncertainty.

“We continue to believe that US sovereign yields should end the year lower as inflation and economic growth slow and the Fed cuts rates in the last months of the year,” strategists said in the note.

“We expect the yield on the 10-year US Treasury to fall toward 3.85% as the year progresses, underpinning our most preferred view on fixed income,” they added.