Is the Stock Market Set for A Cruel Summer?

Economic

Stocks

Summary:

These fears have been fuelled by persistent US consumer price inflation…

Summer is coming, and all too often that spells a slowdown for the stock market, as traders grow drowsy and dream of beaches.

Many recall the old advice to "Sell in May and go away …" and wonder whether there's truth in it.

April was the cruellest month, with the S&P 500 falling 4.1 per cent. With the long-awaited first US interest rate cut postponed to the autumn, or possibly 2025, investors could be forgiven for having sunshine on their minds, rather than stocks and shares.

Those feeling guilty about absenting themselves can take solace from summers past, says Tony Hallside, chief executive of Dubai-based prime brokerage firm STP Partners.

"Historically, the S&P 500 has grown just 2 per cent for the six months from May through October, compared with a 7 per cent gain from November through April."

While this supports the "Sell in May" thesis, as ever with investing, past performance is no guide to the future, Mr. Hallside warns.

Not every summer is a washout. So, what about this one?

Mr. Hallside is wary as the spring rally has left stocks looking overvalued.

"Investors are right to be cautious, due to the potential for a correction," he says.

Selling in May – or any month – is never a good idea, unless you need the money. It's better to sit tight, let the dividends roll in, and keep an eye open for opportunities.

"Investors should consider adopting a defensive approach, taking advantage of the recent pullback to buy quality stocks at lower prices," Mr. Hallside says.

Fears that 2024 would be a cruel summer for investors have been fuelled by US consumer price inflation, which climbed from 3.2 per cent in February to 3.5 per cent in March, instead of falling as hoped.

Markets had hoped for six interest rate cuts across 2024, which would cut borrowing costs and increase growth.

With inflation proving hot and sticky, they now expect two at best, with the first delayed until September. We may get none at all.

Marc Pussard, head of risk at APM Capital, says that given today's heavy weather, even buying the dip may be risky.

The S&P 500 is up 6 per cent this year, despite April's dip, which he suggests looks "frothy", given that the US economy grew a disappointing 1.6 per cent in the first quarter.

A recession cannot be ruled out, either. The US yield curve has been signalling a slump since July 2022.

"If that continues, it would only be a matter of time before equity markets reflect this sentiment," Mr. Pussard says.

He notes that US Federal Reserve chair Jerome Powell has said that its decisions will be data-dependent.

"Maybe this isn't the time to buy the dip, but rather sit on your hands and wait for more data," Mr. Pussard says.

Or sit on the beach, maybe? It's tempting.

Yet, there was a flurry of excitement when April's US labour market report was published last week and turned out to be softer than expected.

"With fewer job gains, moderate earnings growth and slightly higher unemployment, the market is seemingly finally cooling," says Julius Baer chief economist David Kohl.

"Lower inflation risks increase the probability of more rate cuts in 2024."

Just not in the summer. "We continue to expect the Fed to start cutting at its September meeting," Mr. Kohl adds.

Mohamed Hashad, chief market strategist at Noor Capital, is not expecting a cool, quiet summer.

Not with inflation high, trading volumes down and inflation falling faster in Britain and Europe than in the US.

Monetary policies are starting to diverge. "Inflation is declining in the EU and the UK, but interest rate volatility exists in Japan," he says.

The UK was hit harder by the inflation shock than most, because of its reliance on imported oil and gas. Now price growth seems to be slowing faster than elsewhere. April's data could see inflation falling back to the Bank of England's 2 per cent target.

If that happens, the central bank will come under intense pressure to slash interest rates even if the Fed doesn't.

The UK economy desperately needs a lift, with the Organisation for Economic Co-operation and Development predicting it will be the slowest growing in the G7 over the next two years.

While Wall Street fell in April, London's FTSE 100 broke the 8,000 barrier for only the second time ever, as it hit a string of all-time highs.

UK shares remain cheap after Brexit, and international investors have taken note.

Eurozone inflation fell to just 2.4 per cent in March, which means the European Central Bank could have a decision to make, too.

Yet the US still leads the way and it's facing a bumpy summer, says Vijay Valecha, chief investment officer at Century Financial.

US tech has driven the market rally, but Nvidia and Tesla look pricey.

"The S&P 500 is trading at about 20 times earnings forecasts, above the historical average. Strong earnings alone may not sustain the rally, and companies will need to consistently surpass estimates to justify higher stock prices," he adds.

Investors are becoming more demanding and seeking positive surprises. They may not get them, Mr. Valecha says. "Stagflation is a real risk."

With US interest rates stuck at a 22-year high, borrowers are coming under pressure, increasing the risk of company defaults.

"In a higher-for-longer interest rate environment, firms are depleting their cash reserves as earnings moderate and debt servicing costs rise," Mr. Valecha says.

The International Monetary Fund highlighted the growing number of small and medium-sized companies whose cash reserves are running low, he adds.

"Defaults are also increasing in the leveraged loan market, where financially weaker firms borrow, yet most investors have disregarded these concerns."

Mr. Valecha suggests that investors should "go light on their equity investments", and even consider seeking safety in US government bonds.

Many will read that and wonder whether they should follow their instincts and hit the beach after all.

The excitement may arrive in September when we get that first-rate cut.

It's tempting but investors shouldn't completely tune out. Markets called spring wrong. Summer might be full of surprises, too.

Source: The National News

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Thomas

Energy

India's coal-fired electricity generation and power sector emissions hit record highs during the first quarter as above-average temperatures spurred higher air conditioner use and economic expansion drove greater overall power consumption.

Coal-fired electricity output hit 338 terawatt hours during the first quarter of 2024, according to think tank Ember, which marked a 9.6% rise from the same quarter in 2023.

Total power sector emissions climbed by the same degree to a record 316 million metric tons of carbon dioxide and equivalent gases. India Fires Up Coal Use and Emissions During Election, Heat Wave_1

India Fires Up Coal Use and Emissions During Election, Heat Wave_1

The country's power sector discharged a record 108 million tons of CO2 in March alone, and has emitted more than 100 million tons of CO2 each month so far in 2024, a record stretch for the country's power suppliers.

An extended heat wave throughout much of the country has likely resulted in even higher coal-fired generation since March, as power firms attempt to avert outages during the ongoing general election.

Intense Heat

A key driver of the high levels of coal use has been the extended stretch of above-normal temperatures across much of the country.

Recorded high temperatures in the northern state of Haryana, which borders the country's capital New Delhi, have averaged 38.7 degrees Celsius (101.6 degrees Fahrenheit) since April 1, 9.2 C or 31% above the long-term average, according to LSEG data. India Fires Up Coal Use and Emissions During Election, Heat Wave_2

India Fires Up Coal Use and Emissions During Election, Heat Wave_2

In New Delhi itself, recorded high temperatures have surpassed 35 C (95 F) on 26 of the 38 days since April 1, with temperatures averaging around 15% above normal, according to the Weather Underground data service. India Fires Up Coal Use and Emissions During Election, Heat Wave_3

India Fires Up Coal Use and Emissions During Election, Heat Wave_3

The mean temperature in eastern India during April was 28.12 C (82.61 F), the highest since records began in 1901, according to the India Meteorological Department.

Such a prolonged heat wave has resulted in at least nine deaths and reduced voter turnout at election offices as people sought refuge during the hottest parts of the day.

Cool Drive

A key means of keeping cool is through the use of air conditioners, which are power-hungry devices that are becoming increasingly popular in homes and businesses throughout the country.

India has an estimated 93 million air conditioning units installed as of 2024, according to the International Energy Agency (IEA), which in a 2023 report noted that space cooling demand has been a major driver of India's growing electricity demand.

"Between 2019 and 2023, India's hourly electricity demand on a high-temperature day in June (above 36 C maximum daily temperature) increased on average by about 28%, caused largely by increased ownership of air conditioners to meet higher cooling needs and other appliances."

Due to expected further increases in average temperatures in India over the coming decades, electricity demand for household air conditioners is projected to increase nine-fold by 2050, to more than 1.1 billion air conditioning units, IEA data shows.

Cooling With Coal

To keep up with demand, India's electricity producers must crank coal-fired power generation, which accounts for more than 75% of total electricity output in the country, according to Ember.

Indian utilities have aggressively increased generation from renewable sources in recent years, with solar output during the first quarter of 2024 roughly twice the generation total during the same period in 2020.

Output from wind farms has also grown since 2020, by around 30%.

But production from hydro dams is historically volatile due to swings in India's rainfall patterns, with first-quarter 2024 hydro output down 20% from the same period of 2023. And generation from nuclear plants is largely flat, so power firms remain highly reliant on fossil fuels for the lion's share of the country's electricity.

As the emissions stemming from the use of those fuels contributes to further climate change and rising temperatures, the country looks set to remain locked in a vicious cycle of needing to burn more coal to keep cool.

Source: Reuters

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Thomas

Economic

Two years ago, central banks around the world started hiking interest rates. At the time many commentators, including this one, predicted that the end of years of easy money would cause asset prices to collapse and economies to buckle. Yet no recession arrived. Indeed U.S. economic growth picked up after 2022. Following the briefest of bear markets, American stocks hit a new high.

In his book “Expert Political Judgment: How Good Is It? How Can We Know?”, published in 2005, the political scientist Philip Tetlock argues that experts often provide rationalisations for their forecasting failures after the event. One of the most common is “it would have happened except for…”. There is no shortage of such arguments to explain the absence of an economic hard landing.

To start, it is worth pointing out that the bears did not get everything wrong. Bond markets in 2022 suffered their worst 12-month performance since the introduction of British consols in 1753, according to Professor Edward McQuarrie of Santa Clara University. Many speculative investments have crashed. Commercial property markets in many parts of the world are in distress.

Nevertheless, the transmission mechanism between monetary policy and the economy appears weaker than in the past. Yields on long-term U.S. government debt have been lower than short-term bond yields for 18 months. Investors formerly considered such an inverted yield curve as the most reliable leading indicator of a recession.

Economic Hard Landing Is Delayed But Not Cancelled_1

Covid-19 stimulus lingered long after the emergency was over. During the pandemic, the federal government in Washington made vast transfers to American households. Excess consumer savings peaked at $2.5 trillion in September 2021, according to Julien Garran of the Macrostrategy Partnership. The subsequent drawing down of this savings pile has boosted consumption.

Furthermore, much of the liquidity provided to the financial system by the Federal Reserve in 2021 and 2022 initially flowed back into the central bank's overnight reverse repo facility. Garran estimates that the recent outflow of these deposits from the Fed has pumped a net $1.25 trillion into U.S. markets, more than offsetting the impact of higher interest rates and the Fed's shrinking balance sheet.

Jamie Lee of The Grantham Foundation has another explanation for why higher interest rates have not choked the economy. Before the financial crisis of 2008, central banks did not pay interest on excess bank reserves. As a result, commercial banks immediately felt the pain of tighter monetary policy. Lee points out that deposits at the central bank are the safest and most liquid form of money, used for settling transactions between lenders. In the past these deposits were scarce and, because they did not attract interest, expensive for banks to hold.

Since 2008, however, the Fed has been paying interest on reserves. They have become super-abundant, rising from $44 billion in March 2008 to $3.5 trillion by March 2024. When the central bank hikes interest rates, it therefore creates money which is paid into the banking system, boosting liquidity. “When the Fed ‘raises rates', it leaves the bid-ask spread for final settlement money unchanged, at virtually zero. Tightening is not tightening after all,” Lee explains. In this sense, more restrictive monetary policy is actually easier.

Economic Hard Landing Is Delayed But Not Cancelled_2

There are two other reasons why the U.S. economy has shown itself less sensitive to higher interest rates. Torsten Slok, chief economist of Apollo Global Management, argues that both homebuyers and corporations took advantage of easy money conditions to borrow at low interest rates. Because interest payments on most U.S. residential mortgages are fixed for decades, homeowners have been insulated against rate hikes.

Meanwhile, large U.S. corporations extended the maturity of their debt during the pandemic. With the investment-grade corporate debt market having grown from $3 trillion in 2009 to $9 trillion today, American companies have become less sensitive to short-term movements in interest rates, according to Slok.

At the same time, large companies are now receiving more interest income on their deposits. This explains the curious fact that net corporate interest payments in the United States fell after the Fed raised interest rates.

The second reason for the U.S. economy's resilience to monetary tightening is an extraordinary spending splurge by the government. The federal deficit in 2023 was $1.7 trillion, equal to 6.3% of GDP. This provided a strong tailwind for growth, employment, and corporate profits.

Economic Hard Landing Is Delayed But Not Cancelled_3

These various monetary and fiscal supports are now largely exhausted. U.S. aggregate demand and corporate earnings will face a squeeze when Washington reins in spending. Excess deposits in the Federal Reserve's reverse repo facility are at a fraction of their peak. Consumers have largely spent their pandemic-era excess savings.

Meanwhile, tighter monetary policy is pinching. The U.S. commercial real estate market is a slow-motion train wreck: vacancies are sky-high and property valuations are down sharply. Hedges against higher interest rates, which typically last for three years, are expiring and are prohibitively expensive to renew. Defaults on commercial mortgage-backed securities are rising.

Many real estate borrowers are seeking to amend and extend their maturing loans. Owners of multi-family apartments — buildings divided into multiple homes — are struggling to pay interest on floating-rate loans, many of which are held by collateralised loan obligations. Apartment construction in the United States surged during the pandemic: a record one million multi-family apartments were under construction last year. Oversupply may further depress prices, hurting both real estate developers and lenders.

Economic Hard Landing Is Delayed But Not Cancelled_4

The leveraged buyout industry is wilting under the heat of higher interest rates. The International Monetary Fund recently warned of systemic risks posed by the $2.1 trillion “opaque and highly inter-connected” world of private credit dominated by private equity groups. Private companies which cannot access the bond markets are also suffering from higher interest costs. Hordes of corporate zombies are slowly returning to their graves.

The economist Milton Friedman famously said that monetary policy works with long and variable lags. Those lags may be longer and more variable today than in earlier times. But sooner or later, they end. Tetlock's experts had another favourite comeback when faced with a mistaken prediction: “it hasn't happened yet,” they said. Those who foresaw a hard landing that has so far proved elusive might say the same.

Source: Reuters

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Warren Takunda

Economic

Stocks

U.S. stocks rose on Friday, as investors eagerly awaited comments from Federal Reserve officials to get more clarity on the U.S. monetary policy path, after economic data this week supported bets of interest rate cuts.

Wall Street indexes were inching closer to record highs following a selloff last month, as a slew of economic data pointed to a cooling U.S. labor market, raising expectations that the Fed will cut borrowing costs more than once this year.

A much better-than-expected earnings season has also helped put the benchmark S&P 500 (.SPX) and the tech-heavy Nasdaq Composite (.IXIC) on track for their third consecutive week of gains.

The Dow Jones Industrial Average (.DJI) was up for the eight straight session, its longest daily winning run since December, and set for a fourth week of gains.

The blue-chip index was also closing in on the 40,000 threshold for the first time.

"This is the classic point of bad news is good news because the employment data over the last two weeks has been what the Fed has finally been looking for," said Hugh Anderson, managing director at HighTower Advisors.

"Of course it isn't good for the job seeker, but it creates an optimistic environment for the market because now they're looking for their interest rate cuts."

Traders are currently pricing in 45 basis points of rate cuts by the end of 2024, according to LSEG's rate probabilities tool, with the first cut of 25 bps seen in September.

While most Fed policymakers have reiterated that the next policy move will be a rate cut, doubt still remains about when the easing will begin.

There is "considerable" uncertainty about where U.S. inflation will head in coming months, San Francisco Fed President Mary Daly said on Thursday.

Speeches from a host of Fed policymakers — Minneapolis President Neel Kashkari, Dallas President Lorie Logan and Vice Chair for Supervision Michael Barr — during the day, could offer more clues on the rate path.

Investors will also closely monitor the University of Michigan's preliminary survey of consumer sentiment for May, which is due at 10 a.m. ET.

Of the 11 S&P 500 sectors, information technology (.SPLRCT) led gains with a 1% advance.

At 09:37 a.m. ET, the Dow Jones Industrial Average (.DJI) rose 165.26 points, or 0.42%, to 39,553.02, the S&P 500 (.SPX) gained 20.84 points, or 0.40%, to 5,234.92 and the Nasdaq Composite (.IXIC) gained 67.49 points, or 0.41%, to 16,413.76.

Nvidia (NVDA.O) gained 2% in early trading after Taiwan Semiconductor Manufacturing Co (2330.TW), the world's largest chipmaker and a major supplier to Nvidia, reported a near 60% jump in April sales.

Novavax shares (NVAX.O) more than doubled in value after the vaccine maker removed doubts about its ability to remain in business and struck a licensing deal worth up to $1.2 billion with Sanofi (SASY.PA) for COVID-19 vaccines.

SoundHound AI (SOUN.O) jumped 19.5% after its first-quarter revenue beat market estimates.

Advancing issues outnumbered decliners by a 2.37-to-1 ratio on the NYSE and by a 1.41-to-1 ratio on the Nasdaq.

The S&P 500 posted 42 new 52-week highs and no new lows, while the Nasdaq recorded 104 new highs and 17 new lows.

Source: Reuters

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Warren Takunda

Economic

Dollar exchange rates continue to retrace 2024 strength, with the most recent declines being attributed to fresh evidence that the U.S. economy is cooling.

"The dollar was slammed lower as traders interpreted the cracks in the labor market as a harbinger of cooler inflation ahead, which in turn would allow the Fed to cut interest rates faster," says Marios Hadjikyriacos, Senior Investment Analyst at XM.com.

Applications for unemployment benefits - initial jobless claims - rose by a brisk 231K last week, which is usually an early sign of workers being laid off. "The highest reading in nearly nine months supported the case for rate cuts," says analyst John Meyer at the SP Angel.

"This is another indication that the jobs market is losing momentum, following an uptick in the unemployment rate last month and warnings from business surveys that companies have started to reduce workforce numbers," says Hadjikyriacos.

Euro-Dollar rose above the 1.07 marker last week after the official jobs report showed non-farm payrolls increased 175K in April, down from March's 315K and undershooting expectations for 238K.

The official unemployment rate unexpectedly rose to 3.9% from 3.8% while average hourly earnings rose 0.2% month-on-month in April, down from the previous month's 0.3% and below expectations for 0.3%.

"Our bullish USD view has been based on two motivating pillars: the dollars carry advantage despite being a defensive currency and persistent U.S. exceptionalism. The former remains intact, but the latter appears to be in the early stages of losing its sheen," says Meera Chandan, an analyst at JPMorgan in London. Euro-Dollar Looks to Clock 4th Consecutive Weekly Advance_1

Euro-Dollar Looks to Clock 4th Consecutive Weekly Advance_1

Above: EUR/USD at weekly intervals. It is still too soon to say the trend has turned.

Euro-Dollar continues to be driven by the bigger Dollar, meaning the advance will depend on further signs of a U.S. economic slowdown.

"Next week will be critical for the US dollar, featuring the simultaneous release of the latest retail sales and CPI inflation prints on Wednesday. It is a rare phenomenon for two top-tier US economic datasets to be released together, which sets the stage for heightened volatility in the markets," says Hadjikyriacos.

Valentin Marinov, Head of FX Research at Crédit Agricole, says in the absence of any significant upside inflation surprises or hawkish signals from the Federal Reserve, global financial conditions should remain supportive for FX carry trades.

The Dollar is a leading beneficiary of the carry trade, a trade that sees investors borrow in low interest rate currencies (JPY, CHF) and invest in high interest rate currencies (USD).

"Next week’s US CPI and retail sales as well as Fed speeches (including a speech by Jerome Powell on 14 May) would thus attract considerable attention," says Marinov.

For now analysts see weakness as a counter-trend correction from overbought conditions, but doubts about the Dollar's ability to retest 2024 highs will grow if next week's inflation figures suggest the stalled disinflation process is underway again.

Source: Poundsterlinglive

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Samantha Luan

Economic

Consumer goods giants from PepsiCo to Kraft Heinz have described recently how the combination of high inflation and higher interest rates is hurting their lower-income customers.

It's the culmination of everything getting more expensive amid high inflation, even if it's not as bad as before, and the drag of higher interest rates because of more expensive credit-card and other payments.

Remarkably resilient spending by U.S. consumers overall has been one of the main reasons the economy has avoided a recession, at least so far. Capitulation at the lower end of the spectrum could be the first crack for the economy.

“The lower income consumer in the U.S. is stretched,” PepsiCo CEO Ramon Laguarta said late last month when reporting better profit than expected, and “is strategizing a lot to make their budgets get to the end of the month. And that's a consumer that is choosing what to buy, where to buy, and making a lot of choices.”

At Tyson Foods, during a conference call to discuss its better-than-expected results for the latest quarter, one of the first questions asked by a Wall Street analyst was for executives of the company to describe how they see the state of the U.S. consumer.

“As you know, the consumer is under pressure, especially the lower income households,” Chief Growth Officer Melanie Boulden said.

She said the producer of beef, pork, chicken and prepared foods has seen customers shift away from fine dining and toward quick-service restaurants. It's also seen customers drop down from those not-as-expensive restaurants to eating more at home.

Kraft Heinz CEO Carlos Arturo Abrams-Rivera also said lower-income customers are pulling back from restaurants and convenience stores. That's even as higher-income earners buy more Kraft Heinz products because they're spending more on travel and entertainment.

At Mondelez International, Chief Financial Officer Luca Zaramella recently told analysts that U.S. sales of some products particularly popular with lower-income households have been weakening, such as Chips Ahoy cookies.

Much of the commentary recently has come from big food and drink companies, but several retailers will be joining them in upcoming weeks. Walmart, Dollar General and others will offer more evidence about how well or not lower-income Americans are faring.

Of course, it's not just the lowest-earning households bothered by higher prices for seemingly everything.

“We're in an environment where the consumer is being price discriminating and, again, that's not just something that's low income,” McDonald's CEO Chris Kempczinski said after reporting his company's latest quarterly results. “I think all consumers are looking for good value, for good affordability, and so we're focused on that action.”

Source: Fortune

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Goldman Sachs

Economic

Bond

For now, while there are few signs that Washington will cut deficits anytime soon, there appears to be enough investor demand for the sheer amount of Treasury debt, according to Jonny Fine of Goldman Sachs Global Banking & Markets and Alec Phillips of Goldman Sachs Research, who discussed the topic on an episode of the Goldman Sachs Exchanges podcast.

The US federal budget deficit is estimated to rise to $1.7 trillion this year from $1.375 trillion in 2022, according to Goldman Sachs Research. In order to fund rising deficits, the US Treasury department has to issue more debt, “so we're seeing these very, very large amounts having to clear through the market,” says Fine, head of Global Investment Grade within the Financing Group. “The main concern is: Where's the demand coming from to satisfy all of this supply?”

Fine adds that as a corollary to this, some wonder whether “the yield curve needs to reprice in order to effectively accommodate the issuance needs of Treasury.” In other words, will Treasury bond prices have to fall (and yields rise) in order to entice investors to buy yet more bonds?

Yields have indeed risen substantially this year. But Fine clarifies that this is much more about Federal Reserve policy than it is about a growing supply of Treasury debt. Bond yields are reacting to burgeoning expectations that rates set by the US central bank will be relatively higher for longer.

Are Rising US Budget Deficits Causing Treasury Yields to Climb?_1

As far as the climate in Washington, Chief US Political Economist Phillips says few politicians seem committed to curtailing deficits, which he finds unsurprising given the low level of voter focus on the issue. Interestingly, Phillips says that whether government is divided or not could have a more significant on the deficit than the winner of the presidential election.

Major fiscal legislation typically passes when one party controls everything — the House, the Senate, and the White House, Phillips says. “In the case of an all-Republican scenario, that probably means extending all of the expiring tax cuts plus probably a little bit more on top of that,” he says. A Democrat-controlled Washington will likely increase spending.

A divided government, on the other hand, may struggle to pass major legislation. “It just becomes very difficult to do very much,” Phillips says. “And because you have some fiscal restraint built into the law – tax cuts are set to expire, you have spending caps in place, etc. – doing nothing actually, surprisingly, probably results in a slightly smaller deficit than the other scenarios.”

Taking the longer view, Phillips observes that the bulk of US debt has been added during recessions, which is part of what makes recent deficit spending so unusual. “I think the big question for the fiscal side ultimately is: When does the next recession occur, and what is the fiscal response to that?”

From a market perspective, Fine predicts that “we'll get moments in time where people will be concerned about deficit financing and Treasury issuance.” He adds that poor demand at a Treasury auction (in which investors, banks, and brokerages submit bids to the government for Treasury securities) could precipitate “a selloff and a lot of headlines.” But he says this will likely be “a bump in the road” for markets, rather than the cause of a major correction.

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