Market 02/05: Stocks cool off, expectations for interest rate changes

Rate cut from March is not the Fed's plan (not a Fed’s baseline)
- … waiting for data to confirm inflation can fall to 2% (although the Fed doesn't need to wait for inflation to reach 2% before cutting rates).
- Forecast interest rates may still be 4.6% by the end of this year.
No political factors or elections in policy decisions.
Economic slowdown from China not too impactful to the US.
On commercial real estate:
- Large banks can cope.
- Fed will help small banks overcome expected losses.
Full interview here.

After Powell's interview response, Goldman Sachs predicts … possibly the first rate cut will take place around mid-year this year.

Inflation is progressing towards the Fed's target.
Interest-sensitive sectors are still performing well, some factors to consider such as consumer delinquency rates are rising.
Neutral interest rate (neutral interest rate) estimated high, allowing the Fed to continue waiting and watching inflation data.
FYI: Neutral interest rate is the equilibrium rate to ensure full employment and production in the economy.
- Neutral interest rate cannot be observed directly but only estimated through models.
- Current high neutral interest rate means the economy can still maintain full employment and production at current interest rates. (No cracks yet in the labor market or production at current rates).

Likelihood of Fed rate cut in March not high (but not ruled out): need more data to assess.
Economy still quite strong.
Inverted yield curve cannot be used as a recession indicator.
No serious problems seen from regional banking system.

Goolsbee usually has a "dovish" view, but recent statements seem neutral.

Market sentiment has changed rapidly:

market now predicts only 4 times (last month market still predicted 6 rate cuts)

Odds of Fed rate cut in March now down to 14.5%.
With belief rates remain high, USD continues to strengthen: DXY trading at highest since mid-November, reaching 104.45, up +0.49% on the day.

Previous Viet Hustler analysis on Fed rate path:

S&P Global Services PMI rises to 52.5 in January (> 51.4 in December), highest since June 2023.
ISM Services PMI also much higher than expected, up from 50.5 in December to 53.4, highest since October.

The strong upward momentum mainly comes from the increase orders and employment.

… however Prices Paid (prices paid for raw materials) also increased significantly, the largest monthly increase since 2012!
→ Business costs are increasing at a faster rate.
- Businesses are facing surging shipping costs due to attacks in the Red Sea forcing shipping companies to reroute.

A series of restrictions by the Chinese government on the stock market:
- Restriction on short selling Hong Kong stocks.
- Some investors cannot sell positions (sell positions).
- Some Quant funds are completely banned from placing sell orders.
- Other Quant funds are banned from reducing leveraged positions (leveraged positions).

Chinese market officially loses 7 trillion USD over the past 3 years.
- CSI 1000 down 8% today and sharply down 30% just in the first month of 2024.
- Of which the decline mainly comes from small-cap stocks.

Middle East conflict affects McDonald's quarterly revenue

Global sales: +3% YoY.
- Sales in developed markets only up +0.7% , due to the impact of the Israel - Hamas war.
  - Some stores also had to temporarily close to ensure employee safety from protests.
Revenue: +8% YoY, reaching 6.4 billion USD (< 40 million USD expected).
Non-GAAP EPS: 2.95 USD (> 0.12 USD expected).
Dividend: +10% YoY, reaching 1.67 USD.

McDonald stock down more than 3% in the session.

Continuing the layoff wave: Snap Inc lays off 10% of global workforce (~500 employees) to cut costs as ad revenue declines.
- The mass layoff wave could extend to Q2/2024.
Air Products down more than 8% pre-market on Monday due to slowing production and declining demand in Q1.
Quality issues on some Boeing 737 MAX aircraft will delay some deliveries.
OECD raises global economic growth outlook: from 2.7% to 2.9%.
- However, OECD also warns that if the Red Sea situation persists, CPI could rise an additional +0.4% within a year.