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  • Writer's pictureRealFacts Editorial Team

RealFacts Weekly Economic Trends Report

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This Week’s Topics

Gasoline Prices Are Driving Up Inflation: They Will Probably Continue To Do So

March Consumer Price Index data showed that inflation is still on the rise and not going away soon. A main driver of this increase in CPI was the increase in gasoline prices. The average gas price across the nation rose 23 cents in March to $3.62 per gallon. It will probably keep rising, especially with the increase in oil prices. Avi Saltzman of Barron’s wrote, “The overall CPI rose 0.4% in March from the previous month, ahead of expectations for a 0.3% gain. Gasoline, which accounts for a 3.3% weight in the index, rose 1.7% for the month on a seasonally adjusted basis.” On the heels of this, gasoline prices in April have already begun to increase, this will cause CPI data next month to come in hot as well. There are two main reasons that gasoline prices are currently increasing, both have to due with rising oil prices:

  1. Rising oil prices due to geopolitical tensions in the Middle East

  2. Increasing margins due to lack of oil refineries currently in operation

Regarding the Middle-Eastern tensions, Saltzman wrote, “Oil prices are elevated because tensions in the Middle East have increased, with Iranian proxies attacking Israel and Israel responding. Analysts have begun hiking their oil price targets, with some predicting that oil could get to $100 per barrel.” Last week, Brent crude prices broke above $90 a barrel, a six-month high in prices.

There also seems to be a current shortage of operating oil refineries in the United States, this means that refiners can increase prices due to the lack of supply. There are many refineries in western United States (specifically California and Washington) that are currently undergoing severe maintenance and therefore are not in operation at this time. This means that oil prices in the United States, especially the western states, will continue to increase until mid-may when many of these refineries are back in operation. Tom Kloza, global head of energy analysis at OPIS, says that gas prices will increase for the next month and peak at a national average of $3.75-$3.90 a gallon in the early summer.

Source: Barron’s, Avi Saltzman

Optimism Diminishing Among Small Business Owners

The most recent release from the NFIB indicates a decline in optimism among small business owners. Scarlet Fu, Host of Bloomberg Markets: The Close stated, “Optimism among small businesses dropped to a more than 11-year low last month.” Diminishing optimism among small business owners may be attributed to several factors, including the increasingly prevalent “higher for longer” narrative concerning the Fed’s interest rates.

Additional factors contributing to diminishing optimism, as reported by the NFIB, include concerns such as weaker sales (29% of small business owners), rising prices of materials (17%), inflation impact (25%), and a cautious labor outlook. As Simone Foxman from Bloomberg News highlighted, only 11 percent of small business owners “expect to add workers in the next three months, that’s the fourth decline in a row.” The chart below displays the seasonally adjusted Small Business Optimism Index over the past 14 years. Notably, there has been a consistent decline in the index over the last 5 to 6 years, with March marking a low point.

Small Business Optimism Index Graph

Seizing Opportunities: Maximizing Returns in Today's Economic Climate

In the current economic landscape, individuals seeking to save money are confronted with a pivotal decision, aiming to optimize returns on their cash investments. In CNBC’s article “Cash savers still have an opportunity to beat inflation amid cloudy forecast for interest rate cuts,” Chief Financial Analyst at Bankrate, Greg McBride, says, “We’ve now had two years in a row where both liquid savings and timed deposits like CDs [certificate of deposits] are paying yields that are well ahead of inflation,” This delay has presented savers with an opportunity to capitalize on some of the most favorable returns on their cash in recent memory, marking a departure from the low yields experienced over the past fifteen years.

McBride underscores the importance of seizing this opportunity to secure advantageous rates, advocating for a range of investment options such as CDs, Treasury bills, and Treasury Inflation-Protected Securities (TIPs), all of which offer attractive returns. Notably, Series I bonds have emerged as particularly appealing, boasting an after-inflation return that exceeds previous years. However, many of these investments necessitate savers to commit to specific timeframes, potentially facing penalties if funds are withdrawn prematurely.

Despite the enduring popularity of traditional brick-and-mortar banks, McBride encourages the exploration of online high-yield savings accounts renowned for their competitive rates. While a significant portion of the population still favors the familiarity of local bank branches, McBride assures savers that maintaining relationships with their current financial institutions is feasible through linked accounts. Ultimately, he underscores the paramount importance of aligning investment decisions with individual financial objectives and liquidity requirements.

Source: CNBC

Surprising Leap in CPI Sparks Inflation Concerns and Market Volatility

In March, the consumer price index (CPI) experienced an unexpected gain, surpassing expectations and indicating a significant acceleration in inflation. The index rose by 0.4% for the month, marking a 3.5% increase over the past year, which exceeded the anticipated 3.4%. Even when excluding volatile food and energy prices, core CPI climbed by 0.4% monthly and 3.8% annually, outperforming expectations. This unexpected surge sent ripples through the stock market, triggering a downturn in stocks while Treasury yields went up.

The increase in the all-items index was mainly driven by rising shelter and energy costs. Energy prices ascended by 1.1%, following a 2.3% climb in February, while shelter costs saw a 0.4% increase for the month and a memorable 5.7% gain year-over-year. These figures defied expectations, particularly concerning the trajectory of shelter-related expenses, which the Federal Reserve had hoped would decelerate enough to warrant interest rate cuts. Meanwhile, food prices experienced a modest 0.1% increase for the month, with obvious fluctuations within categories such as meat, fish, poultry, and eggs. Additionally, used vehicle prices dipped by 1.1%, while medical care services prices saw a 0.6% gain. This inflationary surge also showed challenges for workers, with real average hourly earnings stagnating for the month and showing a skimpy 0.6% increase over the past year, according to the Bureau of Labor Statistics.

The report prompted a reevaluation of market expectations regarding Federal Reserve policy, with prior forecasts of rate cuts as early as June now shifting to September. Fed officials, mindful of the persistent inflationary pressures, have expressed unwillingness towards immediate rate reductions. Despite hopes for a slowdown in services inflation, recent data has demonstrated resilience, causing cautious optimism within the Fed. As markets await insights from the March meeting minutes, several officials have voiced doubt about the necessity of rate cuts, with some even contemplating the prospect of rate hikes if economic data diverges from expectations.

The CPI data for March was released this week and it does not bode well for lower inflation; it may even indicate that the Fed won’t be able to cut rates in June. The cost of living in the U.S. rose 0.4% in March, this is the third month in a row that this figure has risen. Headline CPI rose from 3.2% to 3.5%, economists surveyed by FactSet were estimating 3.4%. The core rate also rose 0.4%, which leaves the yearly rate unchanged at 3.8%.

Vivien Lou Chen of MarketWatch wrote, “Fed-funds futures traders now see an 84.7% chance that the Fed will leave interest rates unchanged at between 5.25% and 5.50% by June, and just a 15.1% likelihood of a quarter-point rate cut by then, according to the CME FedWatch Tool. They also boosted the likelihood that either no rate cuts will occur by year-end, or just one or two cuts will be delivered.” In addition to this, Frank Rybinski of Aegon Asset Management said, “June is off the table, we’re viewing two cuts beginning quarterly with the first coming in September and then another in December.” The CPI data seems to be a clear indicator that the Fed won’t be cutting rates as anticipated, this has led to a steep drop in index prices during Wednesday’s trading day.

The Fed doesn’t want to begin lowering rates until inflation is around their target rate of 2%, March’s CPI doesn’t indicate the possibility of that happening soon. Although the Fed still has two more months of data before June, things aren’t looking good for potential rate cuts.

How the Unexpected CPI Report Impacted Investor Confidence and Fed Policy Outlook

The recent Consumer Price Index (CPI) report had a significant impact on financial markets, causing uncertainty regarding the Federal Reserve's expected rate cuts. While Goldman Sachs had forecasted a decrease in U.S. inflation, the unexpected rise in consumer prices prompted a reevaluation of the Fed's policy path. In CNBC’s article, “Goldman still expects U.S. inflation to fall significantly as markets alarmed by a recent rise,” Sam Meredith quotes Christian Mueller-Glissmann, head of asset allocation research at Goldman Sachs, saying, “The problem is that you have certain parts of the inflation bucket right now that are continuing to push things up,” Christian highlights various factors, such as rising transportation expenses and oil prices, that have contributed to inflation surpassing earlier predictions. Nonetheless, Mueller-Glissmann expressed optimism, pointing to anticipated actions by OPEC to help spare capacity and the normalization of wage inflation. This shift in narrative underscores the current doubt surrounding inflation and economic growth. The Federal Reserve's decision to maintain interest rates reflects a cautious approach, with some policymakers revising their expectations for rate cuts downward. Mueller-Glissmann attributes this adjustment to the resilience observed in economic growth, particularly in the corporate and manufacturing sectors, as well as sustained consumer spending.

Source: CNBC

Banking Sector Prepares for Quarterly Reports: Scale Becomes Critical Amidst Interest Rate Dynamics

The upcoming quarterly reports from banks are set to stress the pivotal role of scale, particularly in the aftermath of last year's regional banking crisis. Larger institutions have demonstrated greater resilience compared to their smaller peers, a trend expected to continue amidst revised expectations surrounding Federal Reserve interest rate adjustments. The narrative of "higher for longer" interest rates is set to cushion revenue for major banks while adding to challenges for smaller entities, intensifying pre-existing concerns within the sector. Leading the pack in the upcoming earnings announcements is JPMorgan Chase, the nation's largest lender, followed closely by Bank of America and Goldman Sachs. Central to the discussion is the impact of the evolving interest rate landscape on funding costs and the composition of commercial real estate loan portfolios, a crucial aspect for analysts and investors alike to consider.

This analysis highlights the gap between large and small banks, with entities like Valley Bank struggling with the repercussions of anticipated rate cuts that failed to happen, potentially resulting in downward corrections to net interest income forecasts. The focus also shines on the exposure to commercial real estate, where major banks show a comparative advantage in risk management, a contrast highlighted by recent challenges faced by smaller players such as New York Community Bank.

As the earnings season unwinds, the specter of commercial real estate volatility appears large, particularly amidst sustained elevated interest rates. The careful balance between handling lending operations and minimizing credit risks highlights the strategic priorities guiding the financial performance of banks of all sizes in a changing economic environment.

Source: CNBC

JPMorgan Chase's Q1 Earnings Report: Strong Results Amidst Market Uncertainty

JPMorgan Chase, a titan of Wall Street's financial landscape, recently revealed its first-quarter financial results, impressing analysts with strong performance figures. The banking giant reported a remarkable profit of $13.42 billion, reflecting a notable 6% increase from the previous year. This translates to an impressive $4.44 per share, surpassing the estimated $4.11. Additionally, its revenue surged to $42.55 billion, exceeding the anticipated $41.85 billion, fueled by lower-than-expected credit costs and strong trading activity.

Despite the impressive performance, investor attitudes seemed mixed, which was evident in a 5.2% decline in JPMorgan's shares during midday trading. The bank's cautious outlook for 2024, particularly regarding its projected net interest income (NII) of around $90 billion, left some stakeholders desiring a more optimistic stance. In the CNBC article, “JPMorgan Chase shares drop after bank gives disappointing guidance on 2024 interest income,” Hugh Son quotes Piper Sandler analyst Scott Siefers saying, “strikes us as ultra-conservative (and now leaves room to be revised upward later on), we suspect the unchanged outlook will disappoint investors,” Scott expressed confidence in JPMorgan's trajectory, anticipating the possibility of an upward adjustment in guidance as the year unfolds.

In the same article, JPMorgan CEO Jamie Dimon is quoted saying, “Many economic indicators continue to be favorable, However, looking ahead, we remain alert to a number of significant uncertain forces.” While praising the strong performance across consumer and institutional segments, I remained vigilant about potential challenges ahead. Pointing to concerns about global conflicts and inflationary pressures, Dimon emphasized the importance of caution despite the resilience of the U.S. economy. Against this backdrop of uncertainty, the bank's adept handling of fluctuating rate environments and its outperformance relative to smaller peers bring out its resilience and strategic planning in the active financial landscape.

Source: CNBC

Indexes and Banks Struggle After Poor Earnings

One of the main things being watched this week was the earnings reports of the major banks and lenders. Earnings came in and did not excite Wall Street and investors, this caused a drop in each bank’s shares and the market’s indexes. Barron’s wrote the following about what happened to each bank’s stock:

A graph of 4 bank's stocks

JPMorgan: Lackluster net interest income results are weighing on the stock.

Citigroup: Shares headed lower, along with the broader market, despite an earnings beat. CEO Jane Fraser's turnaround efforts are progressing.

Wells Fargo: Net interest income drops more than expected.

BlackRock: The world's largest money manager reported record assets under management of $10.5 trillion in its first quarter as buoyant markets boosted the firm.

State Street: Earnings per share fell short, but revenue topped Wall Street estimates.

The main reasons for the slightly-disappointing earnings was decreased Net Interest Income. With interest rates being so high, most banks have tightened their lending rules and made it harder for people and companies to get loans. On top of that, the higher rates have caused a decrease in demand for lending as high interest makes the cost of capital too high.

Middle Eastern Tension and Bad Bank Earnings Combine For The Indexes Worst Week of the Year

Tensions in the Middle East regarding oil supply and the financial sector reporting less than satisfactory earnings have combined to give the market its worst week of 2024. Connor Smith of Barron’s wrote the following, “The Dow is down about 2.4% this week, which would be its largest one-week decline since March 10, 2023, according to Dow Jones Market Data. The S&P 500 was on track for a 1.5% weekly decline, its worst week since Oct. 27. The Nasdaq was down just 0.4% on the week. All 11 S&P 500 sectors were on track to close the week lower for the first time since Sept. 22, according to Dow Jones Market Data. Financials were the biggest laggard, with a drop of 3.7%. The best performer has been technology, on track for a drop of 0.3%” Every single sector of the S&P will be negative this week, a wild indicator of fear and hesitation across the entire market. On top of this, the CBOE Volatility Index (The VIX) roared 23% to 18.37 after reports that Israel was preparing for an attack. This spike in volatility, combined with strong selling across all sectors this week, is a clear sign that these factors could contribute heavily to the potential market correction.

Source: Barron’s

Currency Chaos: Central Bank Actions and Market Reactions

In the dynamic landscape of global finance, the actions of central banks and backing within the market dictate the tides of currency movements. Recently, the euro experienced a significant decline, reaching its lowest point in five months. This decline was influenced by the European Central Bank's considerations regarding potential interest rate cuts, in contrast to the Federal Reserve's stance, which remains firm amidst a strong U.S. economy. Investors attentively monitored developments, shifting their attention from Frankfurt to Washington and analyzing signals with anticipation. The euro's downward trend reflected this uncertainty, falling to $1.0644, marking a 0.67% decrease and indicating a potential 1.5% weekly decline.

Meanwhile, across the Pacific, the dollar surged to unprecedented levels, causing the Japanese yen to weaken to its lowest point in 34 years. Japanese authorities closely monitored the situation, contemplating interventions as the yen continued its downward trajectory. The stark contrast between the ECB's cautious approach and the Fed's assertive stance highlighted a growing disparity in monetary policy paths, pushing the dollar index to a five-month high. With U.S. bond yields outperforming their German counterparts, the attractiveness of American assets increased, further strengthening the dollar's position. Amidst the whirlwind of currency fluctuations, the British pound also felt the impact, trading at its lowest level since mid-November. As the dollar maintained its strength, Asian currencies, including the yen and yuan, grappled with the consequences of diverging economic landscapes and monetary policies.

Retailers Brace for Impact: CFPB Regulations Shake Up Credit Card Revenue

The upcoming regulations ordered by the Consumer Financial Protection Bureau (CFPB) are causing seismic shifts in the retail sector, especially within major department stores like Macy’s and Kohl's. Expected to come into effect this spring, these regulations will drastically reduce the late fees imposed on customers, presenting a significant threat to a crucial revenue stream for these retailers. With late fees now limited to just $8, down from an industry average of approximately $32, retailers are bracing themselves for the potential loss of a substantial portion of their highly profitable credit card revenue.

This regulatory upset presents a particularly server challenge for department stores, which are already struggling with declining revenues in the middle of changing consumer preferences and increased competition. In CNBC’s article, “Department stores face another squeeze. This time, with store credit card revenue,” Malissa Repko quotes Jane, CEO and retail analyst at Jane Hali & Associates, saying, “We are talking about an area of weakness, so any cut in revenue is going to be more important to them than another area of retail,” Jane warns that department stores will feel the impact the most, given their already dangerous financial position. For instance, Macy’s reported credit card revenue of $619 million for fiscal 2023, highlighting the significant financial implications at stake.

However, these regulatory changes came at a time when retailers were already struggling with evolving consumer behaviors. Increasingly, shoppers—particularly younger generations—are embracing alternative payment methods such as buy now, pay later services, or showing a preference for credit cards offering experiential perks beyond mere discounts. Moreover, with interest rates on the rise, convincing customers to sign up for or utilize store-branded credit.

Source: CNBC

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