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Fed chief Jay Powell is on Capitol Hill for the first of two days of Congressional testimony that some of us old timers remember as Humphrey/Hawkins.
Nothing jolting in his opening remarks, as you’d expect.
He hinted at more hikes, noting that “inflation pressures continue to run high” and getting inflation back to 2% “has a long way to go.” But he also said given how “far and fast” the FOMC has moved in this tightening cycle, it was “prudent” to keep rates steady at last week’s meeting.
The Fed’s latest dot plot penciled in two more rate hikes for this year, but markets are skeptical.
UBS chief economist Paul Donovan says there is suspicion that the June pause was a quid pro quo for a July hike.
Away from monetary policy, Powell said the Fed is committed to addressing the vulnerabilities of regional banks after the SVB failure.
As for the Q&A, UBS’ Donovan says that due to the partisan agendas, much of the questions will be on the causes of inflation. But what economists would really love to hear is how the Fed will contain profit-led inflation.
The retailer profit share of retail GDP rose to 21% at the end of last year, up from 14% before the pandemic.
Speaking of the Fed and Congress, the Senate Banking Committee is holding a hearing on the nominations of Adriana Kugler to the board, Lisa Cook to a second term and Philip Jefferson to vice chairman. Yesterday, Cook and Jefferson said the top priority is to get inflation down to the 2% target.
If that’s not enough, Chicago Fed President Austan Goolsbee has a Q&A and Cleveland Fed President Loretta Mester will give some informal remarks at a conference right at market close.
Now, here’s a look at how trading is shaping up.
Stocks are lower again, with growth lagging. The S&P (SP500) is off more than half a percent and the Dow (DJI) seeing a smaller drop. The Nasdaq (COMP.IND) is weakest.
Heavily weighted Info Tech (XLK) and Communication Services (XLC) are the weakest sectors.
Rates are up across the curve after Powell’s remarks. The 10-year Treasury yield (US10Y) is up at 3.78% and the 2-year (US10Y) is higher, around 4.75%. The inversion of the 2s10s curve remains at its widest in four decades.
Societe Generale says there is resistance at 3.86% for the 10-year and crucial support for the 2-year at 4.60%.
And bitcoin (BTC-USD) is rallying again, topping $29,000 after hitting its highest level since early May yesterday. The coin is still getting a tailwind from BlackRock (BLK) filing an application to create what would be the first-ever spot bitcoin ETF in the U.S.
Among stocks to watch, Barclays cut its rating on Tesla (TSLA) to Equal Weight from Overweight on the expectation that shares will cool off in 2023. Shares aren’t seeing much pressure, though.
Analyst Dan Levy and team think it is time for investors to take profits following the AI-driven rally and recent Supercharger buzz, although they conceded that there is risk trying to call the top.
He noted that his experience covering the stock has made him “well aware of the potential for TSLA’s stock movements to be driven by more than fundamentals.”
La-Z-Boy (LZB) is slumping. The eponymous recliner maker announced results that beat estimates, but its Q1 revenue guidance came in significantly below consensus.
PureCycle Technologies (PCT) stock is up about 15% after the company successfully manufactured the first batch of Ultra-Pure Recycled resin from post-industrial recycled waste.
Other news of note, Alibaba’s (BABA) continues its AI moves. Ant Group is developing its own large-language model, or LLM, known as Zhenyi.
But any more details are sparse, Reuters reported. According to a recent study, Chinese organizations have launched 79 LLMs in the past three years.
Earlier in June, it was reported that Alibaba was is building its latest AI system into its messaging app a meeting assistant.
Amazon (AMZN) said it will run its annual Prime Day on July 11-12 this year – with new deals scheduled to drop every 30 minutes over a 45-hour period.
Deals will be offered on products from, among others, Lancôme, Peloton (PTON), Victoria’s Secret (VSCO), Yeti (YETI) and Sony (SONY).
Amazon did not say if it will hold a second Prime Day in October like it did last year.
In the Wall Street Research Corner, the biggest bear is having some second thoughts. Morgan Stanley strategist Mike Wilson admits being “so wrong about the S&P 500 this year” the team is trying to decide if their “earnings model may be misleading.”
But he’s unwilling to abandon the model yet and says prices will follow earnings lower.
Wilson said he finds it “hard to get on board with the current excitement and (the) narrative supporting it. While breadth has stabilized, it remains far from supportive of higher prices.”
On AI, Wilson says his team believes in it and believes “it will be a big component in the next boom.”
“We just don’t think it will prevent the deceleration that is already in motion for this year. Instead, we view AI as a cost in 2023 that will pressure margins further as top line disappoints.”
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