We end May with the anticipated PCE (inflation) report. Following yesterday's slide in yields on a GDP report that showed lower growth than previously reported, we end May with 2Y yields at 4.93%, down from 5.05% to begin the month and 10Y yields at 4.55% down from 4.68% at the start of the month. Despite falling yields the 20% decline in Salesforce shares helped lead equities lower for a second straight day. After hours news that the U.S. will slow exports of AI chips is likely to weigh on the most loved equities.
Yesterday's 1Q GDP report showed real GDP revised down to 1.3% from 1.6%, with consumption revised down and PCE component also revised down. On the day ahead we'll get an update to the ATL Fed GDPnow for 2Q, where the last estimate was currently sitting at a strong 3.5%. The NY Fed's nowcast will also be updated today and is much lower at 2.04%.
Away from the data (I’m not touching political news here)…..the STL Fed had a research piece out on Commercial Real Estate that seems to state the obvious issues already well known to the market and probably could have been a post on X/twitter:
- A 'wall of maturities' with $1.7 trillion of CRE loans expected to mature between now and 2026
- Borrowers may be refinancing into higher rates and weakening fundamentals (especially for office)
- A discussion of NOI by real estate sector, noting that higher inflation has raised operating cost as has rising insurance cost, both eroding NOI
- If you didn't know the office sector is having problems, now you do.
- " stress in the commercial real estate market is likely to remain a key risk factor to watch in the near term as loans mature, building appraisals and sales resume, and price discovery occurs, which will determine the extent of losses for the market."
On the day ahead PCE is the main event.
XTOD: Pending home sales, a leading indicator, plunged 7.7% in April to the lowest level since the economy was in pandemic-lockdown recession mode in April 2020. Nice to see how ineffective Fed policy is, right?
XTOD: It's hard to understate just how unprecedented the scale of US fiscal stimulus is at the moment. Not only is the deficit massive for a non-crisis period, but its financing is almost entirely via very short-term issuance, which has never been the case before in a non-crisis time.
XTOD: Hello stagflation. The US GDP growth for the first quarter of 2024 was revised downward from 1.6% to 1.3%. This figure, less than half the growth of the third quarter of 2023, which was 3.4%, paints a stark picture of our economic trajectory. The slowdown in economic growth hinged on consumers spending less this past quarter. That is understandable. Consumers are facing record credit card, auto, and mortgage debt. Consumer prices rose by 3.3% during the first quarter of 2024.
The Fed can't control supply-side or event-driven inflation. Commodity prices are rising. Higher-for-longer rate policy has increased debt burdens for individuals, businesses, and the government. Banks are sitting on more than half a trillion dollars of unrealized losses.
None of that suggests economic growth will beat inflation any time soon.
XTOD: Real GDP (annual rate) revised down to 1.3% in Q1, originally 1.6%. GDI was 1.5%.
Inertial components strong:
--Consumption +2%
--Business fixed investment +6.0%
--Residential +15.4%
--Real final sales to domestic purchasers +2.8%
XTOD: Ex-NY Fed's Bill Dudley: "I think r* is a lot higher than the Fed recognizes, which means the central bank isn’t doing enough to fight inflation...Perhaps the Fed’s mantra, instead of 'higher for longer,' should be 'higher indefinitely.'"
XTOD: Charlie Munger: “It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait.”
Bob Robotti: "It is difficult to maintain patience when managing other people’s money.... The decision to remain patient is an active decision, no less important than buying or selling a security."
XTOD: Here are six practical lessons and actionable ideas from our conversation with Morgan Housel:
1. Aim for financial independence, not just growing wealth. When you can wake up and do whatever you want to do, that's a sign of success.
2. As you make more money, it's okay to spend more money. But people get into trouble when their spending outpaces their income growth. You can move the goalposts, just not too fast.
3. Wealth accumulation is about being average for an above-average period of time.
4. Don't be a slave to FOMO. Stick to your investment strategy, and don’t be swayed by others' short-term gains.
5. The duration of your investment is more critical than the size of your returns.
6. Personal finance should be personal. Make financial decisions based on your personal goals and values, not on societal pressures or what others are doing.
Focus on what makes you and your family happy, and use money to do that more. https://t.co/0aYuxDJYGf
https://x.com/EconguyRosie/status/1796196619743854600
https://x.com/robin_j_brooks/status/1796188130044686668
https://x.com/nomiprins/status/1796228020832989519
https://x.com/jasonfurman/status/1796175901677281692
https://x.com/lisaabramowicz1/status/1796124606677278815?s=46&t=D2AESCsaw42dAEzgmjXHQA
https://x.com/WilliamGreen72/status/1796201858630889807
https://x.com/farnamstreet/status/1795459986698666464
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