This Week's Topics
The Federal Reserve Report and Outlook
On March 20th, the Fed reserve (FOMC) met to discuss the current interest rates and determine if there needs to be any changes. Like we were expecting they are keeping rates where they are at, 5.25%-5.50%. They meet every 6 weeks so expect the next meeting and decision on rates come the first of May, you can look at the calendar below for future and past reports of the Fed's decisions on rates. We are 85% confident that rates will remain the same again come May.
This is an effect on consumer and business buying power, with their ability to take on debt. The federal funds rate is the interest rate that banks charge other institutions (banks usually) to give banks more cash in reserve. With a low rate it is cheaper to borrow money. When more money is in the economy then the more the economy tends to grow.
The Fed hiked rates 4 times in 2023 and now we are sitting steady around this same rate while the economy is still growing. Right now the Fed expects to have rates at 3.9% in 2025 and 3.1% in 2026. This is a testament that they are truly seeking a higher for longer strategy to fulfill a soft landing, by slowing reducing rates slowing the economy.
Unemployment is expected to be higher at 4% from the 3.7% currently this year. GDP is expected to grow to 2.1%. PPI (Producer Price Index) has been growing, in several cases the prices producers take on are going to be passed down to consumers and will raise CPI (Consumer Price Index) higher as well. The goods industry in PPI had the highest percent change from the graph below. Energy and food were mostly responsible for this as they rose 4.45 and 1%. Most business supply chains have been increasing their inventory and buying up more than they need as well. We really are wanting to see a rate cut soon but the Fed has said after the meeting that they want to have greater confidence that inflation is at least remaining steady. Inflation is sitting at 3.2% but we are wanting to move towards the 2% target inflation rate without threatening the health of the economy. Doing anything too quickly in the short term can have a longer lasting effect down the road, if done wrong it could have a reverse effect and put us in a recession and crash the economy.
Source: Bloomberg, Investopedia
We talk a lot about how the Fed uses the federal funds rate to increase or decrease inflation but the Fed has several tools to increase or decrease inflation. One of the other tools they have been using is quantitative tightening. Quantitative tightening is the process in which the Fed sells or lets debt securities mature on their balance sheet. In doing this it raises bond yields and slows the economy by putting a larger supply of bonds into the economy, reducing the price of the bonds. The Fed holds about 8 trillion dollars worth of debt securities on their balance sheet. 5 trillion in treasuries and a little more than 2.5 trillion in mortgage backed securities. In quantitative tightening the Fed can only sell a maximum of 95 billion a month and it has been selling on average 35 billion of mortgage backed securities each month recently. The Fed is still doing this and likely will continue with the quantitative tightening and keep rates where they are until further confidence is determined with inflation to proceed cooling the economy.
Source: Marketscale
A CIO’s View of The Economy - Alan McKnight
While delivering the Fed’s report, Jerome Powell, Chairman of the Fed, said that the economy is performing great and that they are still on track to have three rate cuts this year. However, alongside this great news came the other news that these cuts would be accompanied by increased expected inflation. Alan McKnight, CIO of Regions Bank, joined Bloomberg to give his thoughts on these reports. McKnight had general positive things to say, he mentioned that inflation rates are on the decline but are stickier than previously anticipated and so we need to adjust for a longer time frame. He then went on to say that the current costs of capital or as he put it “costs of getting business done” are “very reasonable from a corporate perspective.” What McKnight means by this is that corporations currently have access to debt and equity financing and rates that are supportive of growth.
McKnight said that we are going from a “Fed driven market to a more economic and earnings based” market. McKnight talked about how going into and during 2023 market participants had the belief that in order for the economy to stay afloat the Fed would have to cut rates at a significant rate. This turned the market into one that had the Fed and FOMC as the main market movers. In reality, the economy held up alright without significant Fed rate cuts and now market participants “are starting to look at what earnings are, growth is still good, and supportive of the valuations that we have.”
Source: Bloomberg
Energy Needs in AI Revolution
During an interview with Alix Steel on Bloomberg Markets: The Close, Ryan Lance, CEO and Chairman of ConocoPhillips, discussed the substantial energy requirements accompanying the AI revolution, particularly in data centers and cloud infrastructure. Lance highlighted the massive energy demand driven by AI machine learning and deep language models, stressing the need for diverse energy sources including wind, solar, nuclear, and oil and gas to meet these needs effectively.
When questioned about the integration of data centers with the power grid, Lance indicated a necessity for a combination of direct power sources and grid connections to ensure continuous energy supply. He underscored the challenges posed by infrastructure requirements, especially transmission lines, in meeting these escalating energy demands.
In essence, Lance's insights underscore the significant energy demands associated with the AI revolution and the critical role of diverse energy sources and infrastructure development in meeting these demands effectively. This highlights the broader impact of AI advancements on energy consumption and underscores opportunities for growth and innovation in related sectors.
Source: Bloomberg
Adapting to Dollar Dynamics: Strategies for a Shifting Investment Landscape
The U.S. dollar has been like a sturdy support beam for American stocks since the financial crisis of 2008. It's played a big role in keeping stock prices high. But now, things might be changing. A top strategist at Morgan Stanley, a big investment bank, says the dollar might not be as strong as it used to be.
Usually, when the dollar is strong, stock prices are high too. We've seen this happen many times in the past. But there have been exceptions, like in 2022, when worries about inflation made the dollar go up even more. People tend to see the dollar as a safe place to put their money when things get shaky in the economy. But if the dollar starts getting weaker for a long time, it could bring some tough times for the U.S. economy. We might see a mix of slow growth and high prices, which is called stagflation. In the article “A U.S. dollar 'regime shift' could threaten stocks, Morgan Stanley warns. Here's how investors can prepare,” authored by Joseph Adinolfi, Morgan Stanley Wealth Management Chief Investment Officer Lisa Shalett cautioned saying “the opposite of the "goldilocks" scenario that has helped bolster U.S. equities over the past year And signs that this "regime shift" is already underway have multiplied recently.”
This would be a change from the good conditions that have been helping U.S. stocks lately
She points to moves made by the Bank of Japan, which could weaken the dollar even more. There are also tensions between countries and changes in how global trade works, which might make the dollar less important and weaken its support for U.S. assets like stocks.
Shalett also talks about how gold, bitcoin, and other things like oil and copper have been doing well lately. This could be a sign that the dollar might not be as strong as before. Even though the dollar's drop in value might not seem like a big deal right now, it's a shift away from what usually makes the dollar strong.
Because of the risks that come with a weaker dollar, Shalett suggests spreading investments into stocks from other countries, like Japan, Mexico, Brazil, and India. It's also a good idea to put money into things like gold and real estate, which tend to do well when the dollar isn't as strong. In the U.S., investing in Real Estate Investment Trusts (REITs) might be a smart move since they've held up well during recent ups and downs in the market.
Even though the U.S. dollar has been a big player in keeping stocks up since 2008, its future isn't so clear. With things changing in the global economy, it's important for investors to adjust their portfolios to handle a weaker dollar. This could be key to keeping finances in good shape for the long haul.
Source: MarketWatch
Is the American Dollar Still King of Global Currencies?
In recent years there has been a lot of talk about the loosening of the dollar’s grip over foreign economies. In recent years several countries around the world have been making moves and deals in order to lower their dependency on the dollar. Despite these moves it appears that the dollar’s grip on foreign economies is as strong as ever. The following statistics are given by Joseph Adinolfi of MarketWatch as he discusses why the idea of “de-dollarization” isn’t actually occurring:
The dollar’s share of foreign currency reserves held by central banks around the world has gone from 70% in 1999 to 60% today. However, Adinolfi writes, “even though the dollar’s share of central-bank reserves has declined since 1999, no single currency has emerged as the primary beneficiary. Instead, the euro remains a distant second, as central banks appear to be diversifying their assets into a broader group of currencies, including the Australian dollar and Canadian dollar.” The slight decrease in the dollar’s share of these foreign reserves is almost comical when compared to the rest of the world’s currency, the euro being second with about 20% and nobody even close to the euro’s levels.
The US Dollar is absolutely dominating in terms of participation in foreign trades and deals being involved in almost 90% of all foreign transactions. It has steadily been rising from its levels of 80% three decades ago.
45% of global debt is put in terms of US dollars, up from 40% in 2022.
“The U.S. dollar’s share of imports remains at around 50%, while its share of exports has declined slightly to around 35%.”
To round this all out the ICE U.S. Dollar Index (DXY), an index that tracks the performance of the dollar compared to six of the other major world currencies, is currently trading at its strongest levels in a month, showing that the global entrenchment of the dollar is on the rise.
Source: MarketWatch
Agriculture Commodities
Covid-19 brought a shortage of food production. Individuals and counties used up much of their storages. When we came out of Covid we overcompensated and over produced and we are seeing the effects of that now. China canceled an order from the US recently of wheat realizing they have sufficient inventory and can now grow more in their own country. More recently there has been unusual weather conditions around the equator with the El Nino Cycle, the heat of El Nino has drastically increased the price of rice, sugar, cocoa, and various fruits, disrupting their harvest.
Examine these two charts based on the price per pound of cocoa beans on the right and price per hundredweight of rice on the left.
Cocoa alone is up 186% this year reaching all time highs. The leaders in cocoa harvesting Ghana and the Ivory Coast reported that they are experiencing one of the worst years in history. With El Nino approaching its second year and the geopolitical risks of shipping routes through the Suez Canal, we are likely to assume the price you pay for your chocolate is soon to increase.
Commodities in agriculture and oil are fairly stable with growing populations, as with the rest of many commodities. As the population of the globe increases the demand for commodities naturally increases. We see slight hiccups in single commodities like we saw a 9% decrease in oil consumption as we were put on quarantine. Four years later we are above and beyond the level of consumption previously in 2019, sitting at all time highs for supply and demand once again. For the moment oil isn't going anywhere as the "greener” ESG alternatives are not as effective, although “greener” it is the direction the younger generation is pushing for. Oil prices likely will stay flat which are not projected to go over $90 a barrel this year. At some point in time, likely more than 2 decades, the ESG, “greener” alternatives may take the place of crude oil. In the meantime we can expect oil and commodities to perform relatively well increasing the supply when demand, and also population is on the rise. You will see large volatility in single commodities from changes in supply and demand, however if well diversified commodities are relatively stable.
Source: Simply Wall Street
Upcoming Events
Wednesday, March 27: Initial jobless claims, GDP (2nd revision), Chicago Business Barometer (PMI), Pending home sales, Consumer sentiment (final)