Confidence is key

06/29/2022 | 10:05am

Several Federal Reserve officials yesterday called for faster raises in interest rates to curb inflation. This led to a mixed Wall Street opening, as investors wonder if the US economy can withstand the Fed’s hawkish policy.

Cleveland Federal Reserve Bank President Loretta Mester called for another 75 basis points at the July meeting, while San Francisco Fed President Mary Daly and New York Fed President John Williams on Tuesday advocated further rapid interest rate hikes.

Any data that give clues about the health of the economy is closely watched. Today, the Bureau of Economic Analysis revealed that the real Gross Domestic Product (GDP) of the United States contracted at an annual rate of 1.6% in the first quarter, which is slightly below market forecasts for a decrease of 1.5%.

The speech of Fed Chair Jerome Powell later today at a European Central Bank forum is also eagerly awaited.

Yesterday, a new reading showed U.S. consumer confidence fell to a 16-month low in June on worries about a looming recession.

The market is a little nervous about the U.S. consumer giving up on purchases. The central scenario for investors, or at least the one they favor, is a soft economic landing. It incorporates sharp rate hikes by the Fed until inflation is under control, economic growth under pressure or even slightly negative, and then a gradual recovery. To avoid the reality of a hard landing, Americans must continue to consume from the wealth accumulated until recently.

The United States has two major surveys of household sentiment: the University of Michigan and the Conference Board. The first was released on June 10 and showed a sharp deterioration in confidence. The second was announced yesterday. The Conference Board's confidence index fell from 103.2 to 98.7 points between May and June. More importantly, the forward-looking component had not been this low for 9 years. In practical terms, this means that pessimism is on the rise among consumers. The deterioration is not as strong as for the University of Michigan's index, which takes into account more the dynamics of the cost of living and the financial situation. Hyperinflation and the stock market decline therefore have a greater impact on this indicator than on the Conference Board's, which takes into account the labor market, which is still flourishing. But it doesn't matter, because the two indicators converge: U.S. consumer spending should be under pressure in the months to come, which is not a good thing for the stock market, for the reason mentioned above. This is one of the main reasons for the weakness on Wall Street yesterday, where the most attacked sector was, quite logically, the consumer cyclical sector: Amazon, Tesla, The Home Depot or Lowe's all lost more than 4%.


Economic highlights of the day:

The first estimate of German inflation for June, the adjusted version of the US Q1 GDP and  weekly oil inventories are today’s main indicators. An important exchange between Christine Lagarde (ECB), Jerome Powell (FED) and Andrew Bailey (BOE) will take place on the sidelines of the Sintra summit. All the macro agenda here.

The euro and the dollar are still neutralized around EUR 0.9505. The ounce of gold is stable at USD 1831. Oil is up with North Sea Brent at USD 119.56 a barrel and US WTI light crude at USD 113.34. The yield on 10-year US debt loses a few points to 3.16% over 10 years. Bitcoin is trading at USD 20,100.


On markets:

* Walt Disney announced on Tuesday that its board members voted unanimously to extend the contract of chief executive Bob Chapek for three years.

* Tesla closed its California office in San Mateo and laid off about 200 employees working on its driver-assist system, Autopilot, one of those fired told Reuters. Tesla's stock was down 1.3% in pre-market trading.

* Pinterest announced on Tuesday the resignation of its CEO, Ben Silbermann, who was replaced by Bill Ready, currently head of sales at Google, a subsidiary of Alphabet. The stock was up 3.6% in pre-market trading.

* Walmart - Texas Attorney General Ken Paxton announced the opening of a civil investigation against Walmart over possible deceptive marketing practices regarding opioids.

* Exxon Mobil and Imperial Oil announced the sale of their Montney and Duvernay shale oil and gas assets in Canada to Whitecap Resources Group for C$1.9 billion.

* General Mills - The group's cereal, snack and pet food sales exceeded expectations in the fourth quarter. General Mills shares rose 2.5% in premarket trading.

* Parker-Hannifin - U.K. authorities announced Tuesday that the U.S. engineering and aerospace company had addressed competition and national security concerns over its £6.3 billion takeover of rival Meggitt.

* Eli Lilly said it would provide additional doses of its COVID-19 antibody drug to the U.S. government to meet demand through the end of August.


Analyst recommendations:

Altria group - Barclays downgrades its recommendation to "Underweight" from "In-line weight" and lowers its price target to $36 from $53. Altria shares were down 3% in pre-market trading.

* Marriott, Las Vegas Sands, Hyatt Hotels, Royal Caribbean, Carnival - Barclays upgraded its recommendation to "Overweight" on these stocks.

* Hilton Worldwide Holdings, Norwegian Cruise Line Holdings, Wynn Resorts, Wyndham Hotels & Resorts - Barclays initiates an "In-line weighting" on these stocks.

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