Happy Friday!
Stocks experience a bumpy week, but Apple earnings provide a sense of relief to wrap up the week’s trading. The Federal Reserve holds interest rates steady as “higher for longer” policy continues. The Fed will slow down its balance sheet reduction to provide additional liquidity to financial markets. High speed rail travel cuts travel time between Las Vegas and Southern California in half. Dave and Buster’s begins live betting on arcade games.
#1 – Weekly Market Recap – A roller coaster of market sentiment kicked off Wednesday following the Federal Reserve’s decision to maintain interest rates, attributing it to the ongoing challenge of meeting the 2% inflation target.
However, there were some positives amidst the uncertainty: Fed Chair Jerome Powell hinted at the unlikelihood of rate hikes and announced a slowdown in the quantitative tightening (QT) program aimed at moderating economic growth.
Encouraged by these developments, investors rushed into the stock market, driving the S&P 500 index up by as much as +1.2% during Powell’s press conference. Yet, the optimism was short-lived, as the rally reversed in the final half-hour of trading, ultimately resulting in a lower close for the S&P 500.
Through Thursday, the three major indices are slightly negative with the Dow Jones down -0.04%, the S&P 500 down -0.70% and the NASDAQ down -1.00%.
The jobs report released by the Labor Department this morning showed U.S. employers added fewer jobs than expected in April – 175,000 jobs were added during the month falling short of economists’ expectations. The unemployment rate also rose slightly from 3.8% in March to 3.9% in April.
Apple reported strong Q2 earnings this morning beating analysts’ expectations despite a 10% decline in iPhone sales. Moreover, Apple made a significant announcement of a new stock buyback program valued at $110 billion. To put this staggering figure into perspective, it’s worth noting that the $110 billion buyback initiative surpasses the market cap of most S&P 500 constituents.
#2 – Fed Holds Steady – The Federal Reserve kept interest rates unchanged at 5.25% – 5.5% at its Wednesday meeting. This marks the sixth consecutive meeting that the Fed has kept rates steady.
As has been the case before recent Federal Reserve meetings, the lack of policy change was widely telegraphed and expected by investors. As a result, investors’ focus centered on future Federal Reserve policy.
Chairman Powell provided little clarity on future interest rate policy at his press conference. He did, however, acknowledge that inflation has been higher than anticipated:
“The signal that we’re taking is that it’s likely to take longer for us to gain confidence that we are on a sustainable path down to 2 percent inflation.”
Powell reacted as expected to the question of whether the next move on interest rates could be a hike rather than a cut:
“I think it’s unlikely that the next policy rate move will be a hike… I think we’d need to see persuasive evidence that our policy stance is not sufficiently restrictive to bring inflation sustainably down to 2 percent over time. That’s not what we think we’re seeing…”
Powell also reacted to a question of whether the U.S. could slip into 70s style “stagflation:”
“I was around for stagflation, and it was 10 percent unemployment, it was high single digits inflation, and very slow growth. Right now we have 3 percent growth and we have inflation running under 3 percent. So, I don’t really understand where that’s coming from… I don’t see the ‘Stag’ or the ‘Flation’.”
Overall, Powell intimated that the “higher for longer” stance that we at DSG Advisors have been writing for the past year is the Federal Reserve’s current policy stance.
Source: Federal Reserve
#3 – Accounting for Liquidity – The headline from Wednesday’s Federal Reserve meeting focused on the lack of a change in interest rate policy for the sixth consecutive meeting –“higher for longer.”
But there was an important announcement that seems to have been overlooked by many investors — the Federal Reserve will be slowing the pace of the Fed’s balance sheet reduction.
You may wonder what this is and why it matters.
Think of the Federal Reserve’s balance sheet as a source of additional liquidity for financial markets. As the Federal Reserve increases its balance sheet liquidity is added to financial markets, which can help drive asset prices higher (Quantitative Easing). Conversely, if the Federal Reserve reduces its balance sheet liquidity is withdrawn from financial markets, and asset prices face headwinds (Quantitative Tightening).
If this relationship holds true, you might wonder why in the chart below asset prices rose in 2023 as the Federal Reserve reduced its balance sheet?
This happened because the negative liquidity impact caused by the Fed’s balance sheet reduction was counteracted by banks moving deposits out of the Federal Reserve’s Reverse Repo facility and back into circulation. Basically, the banks provided liquidity at the same time the Federal Reserve was reducing liquidity.
As shown in the chart above in red, bank deposits at the Fed’s Reverse Repo facility swelled during the pandemic to over $3 trillion. In previous writings, we have referred to the Reverse Repo facility as “unhealthy” liquidity because it is essentially cash “parked” at the Federal Reserve Bank – cash that doesn’t get put back into markets or the economy.
In 2023, the stimulative impact of banks transitioning deposits out of the Reverse Repo facility obfuscated the Quantitative Tightening impact of the Federal Reserve’s balance sheet reduction.
In 2024, with the Federal Reserve continuing to hold interest rates “higher for longer,” and the majority of the reverse repo deposits withdrawn from the Fed’s balance sheet, the Federal Reserve needed a mechanism to provide additional liquidity to financial markets.
That mechanism was the announcement that many investors seemed to have overlooked – the Federal Reserve’s slowing the rate of balance sheet reduction from $95 billion per month to $60 billion per month starting in June.
The practical impact of the Federal Reserve slowing the reduction in its balance sheet is that it is providing financial markets with an additional $30 billion per month of liquidity – slowing the pace of QT. Whether this additional liquidity can prevent asset prices from falling in the near term remains to be seen.
At DSG Advisors, we think the significance of Powell’s announcement Wednesday was that the Federal Reserve implicitly acknowledgement that the policy of keeping interest rates “higher for longer” now requires additional liquidity measures for financial markets to operate successfully. In other words, the combination of “higher for longer” interest rates and aggressive balance sheet reduction will simply be too much of a drag on financial markets and the economy.
Our near-term outlook is that the “higher for longer” policy on interest rates will require the Federal Reserve to further slow the pace of balance sheet reductions in the future to maintain sufficient liquidity for financial markets.
#4 – All Aboard! – Brightline West, America’s only private provider of eco-friendly passenger rail service, officially broke ground last week on the nation’s first true high-speed rail system.
A 218-mile rail system will be constructed connecting Las Vegas to Southern California and will run within the median of Interstate 15 — the main route of travel between Southern California and Las Vegas. Brightline West will run zero emission, fully electric trains capable of speeds of 200 miles per hour. The electric train is expected to reduce the travel time between Las Vegas and Southern California to about 2 hours…about one-half of the normal drive time.
Brightline’s first passenger rail system began operating in 2018 connecting central and south Florida. Other rail projects could soon be in the works. Brightline’s vision is to connect city pairs with congested corridors that are too short to fly and too long to drive.
The project was recently awarded $3 billion in funding from President Biden’s Bipartisan Infrastructure Bill. The rest of the project will be privately funded and has received a total allocation of $3.5 billion in private activity bonds from USDOT. The infrastructure project with be constructed and operated by union labor and it will be fully “Buy America Compliant.”
“This is a historic project and a proud moment where we break ground on America’s first high-speed rail system and lay the foundation for a new industry,” said Wes Edens, Brightline founder. “Today is long overdue, but the blueprint we’ve created with Brightline will allow us to repeat this model in other city pairs around the country.”
Source: Brightline West
#5 – Arcade Game Betting –Dave and Buster’s (PLAY), the popular restaurant and entertainment chain, is getting into the betting business.
Customers will soon be able to make a friendly wager on games like Skee-ball competitions, Hot Shots basketball game and Big Buck Hunter.
With the explosion of online sports betting apps over the past several years, it seems like you can now gamble on almost anything. Dave and Buster’s is not looking to compete with popular online betting companies like DraftKings and FanDuel. Rather, they want to get involved in the social betting category, a $6 billion industry according to gaming research firm Eilers & Krejcik.
Through a new partnership with Lucra, a gamification technology company, Dave and Buster’s will be introducing technology allowing adults, age 18 and older, to place real money wagers on arcade games with friends. D&B loyalty club members will be able to make small wagers, likely between $5 and $10 on arcade games through the company’s app. Ultimately it could mean that customers spend more time and money at Dave and Buster’s 222 entertainment venues.
Lucra calls its games “skills-based” and is careful not to use the term “bet” or “wager” when describing its games. This terminology means Lucra is not subject to the same licenses and regulations that gambling operators face with games of chance according to the company.
“Friendly competition really is a big fuel for our economy, whether you’re playing golf on Sunday with your buddies, or you’re going to play pickleball or video games or even cornhole at a tailgate. There’s so many ways that you can compete with friends and family, and I think gamifying that and digitizing all this offline stuff that’s happening is a massive opportunity,” Lucra CEO Dylan Robbins told CNN.
The technology is expected to be available in the coming months. No word on whether Dave and Buster’s will be charging a fee to get in on the action.
Source: CNN
Source: CNBC
Have a great weekend!
Denver & the DSGCA Team