Interest Rates' Lower For Sooner?

The FOMC decided to hold interest rates steady in as everyone was expecting [The Daily Peel... ]( December 14, 2023 | Peel #606 Silver banana goes to... [CapLinked. ](=) In this issue of the Peel: - The FOMC decided to hold interest rates steady in their range of 5.25%-5.5%, as everyone was expecting. - Vertex Pharmaceuticals and U.S. Steel had a ripe day, while Pfizer and Etsy saw their share price decline. - On Tuesday, Bank of America released its monthly Consumer Checkpoint report out of the firm’s in-house research institute. Market Snapshot Happy Thursday, apes. Unless you’re feeling literally the best you’ve ever felt in your entire life, the Dow had it better than you did yesterday. Hate to break it to you, but what else are we here for if not to ruin your morning? Checking your brokerage app certainly won’t ruin your morning, however. The Dow, as alluded to above, closed at an all-time high, and my “Dow 100k” hat I bought during the pandemic finally seems like it has a chance again. But then again, this index is 30 stocks… weighted on price… so who really cares? Thankfully, the other indexes (those that matter) moved higher, too, thanks to JPow getting back to his money printer vibe that we all know and love. The S&P’s 1.37% move higher was the worst among U.S. majors while the Russell 2k’s 3.39% led, so small caps took the W, but really everyone won. Gains yesterday were like hitting the water when you fall out of a boat, so we can’t really hype up the WSO Alpha apes too much, but we’re just glad they remembered how to tie their shoes today. Baby steps, I guess, as our portfolio got in on the action with a [1.46% gain.]() And, after moving higher just a day prior (no rhyme intended), treasury yields nosedived on the market’s expectations for rates to be “lower for sooner” as opposed to “higher for longer.” The 10-year is about to break through the 4% floor as it closed yesterday’s session right above this key psychological level. Meanwhile, the 2-year broke below 4.5% for the first time since this spring. Let’s get into it. Bonus Got Cut? Here’s How to Get What You Deserve [image](=) Let's be real, this year sucked: layoffs, bonus cuts, impending doom. But it’s not all bad — because CapLinked, the virtual data room for top dealmakers, is stepping in to give you the bonus you deserve. Now through December 31st, CapLinked is playing Santa (and giving you the bonus your C-suite won’t). Every new Enterprise Data Room comes with a luxury bonus of your choice — courtside tickets, designer suits, or even that epic vacation you’ve been dying to take. All on them. The Wall Street Journal called CapLinked "the go-to place for setting up and closing deals" so tell your friends in finance, but keep this a secret from your co-workers. They don't need to know that you are making your own bonus this year. [Here’s how to claim your bonus.]( Banana Bits - [CNBC](=) is officially now JPow’s therapist, explaining why it’s been particularly tough to tame the inflationary beat this time round. - Tough day for Tesla as the firm begins to recall ~2mn vehicles due to fears around [Autopilot-induced accidents.](=) - Oil prices as an [economic indicator]()? Maybe, but only when it supports my investment thesis, obviously… - Investors are [hungrier for risk](=) than my dog is for treats… despite the fact that he (and my portfolio) ate it not very long ago. Macro Monkey Says JPow Blinks FUEL UP THE ROCKETS, APES. WE’RE GOING TO THE MOON!! My bad, guys. There was too much crayon-eating here at the Daily Peel Global Headquarters this morning. We’re a little hyped up. But hey, we have good reason to be. Yesterday, the Federal Open Market Committee (FOMC), which is the rate-setting arm of the Fed, finally blinked. In other words, the (in)famous “higher for longer” may not have actually been all too long after all. The FOMC decided to hold interest rates steady in their range of 5.25%-5.5%, as everyone was expecting. But, two slight changes in language deep within the Fed’s official statement reveal a potential change in mindset that appears to be driving rate expectations in 2024 much lower… and stocks were loving it. First, the Fed added the phrase “has eased over the past year” when describing inflation in yesterday’s statement. That’s the market’s equivalent of a person hearing Runaway for the first time and is the definition of music to their ears. Sure, officials may have been hinting at this fact over recent weeks, but to add that phrase to a Fed statement is a huge step. "... the change in language managed to get traders even higher than the cocaine on their desks for the day ..." Secondly, the word “any” was added to the phrase “... extent of any additional policy firming that may be appropriate to return inflation to 2 percent…” Basically, they’re telling us that rate hikes are about as likely to come back as my dad is after he left to go get some milk 14 years ago. Anyway, the change in language managed to get traders even higher than the cocaine on their desks for the day, but that’s not where things stopped yesterday. This meeting came alongside an updated SEP, or Summary of Economic Projections, indicating that the Fed’s outlook on borrowing costs has improved significantly. The 17-page document can be found [here]() and is essentially just a series of cute little charts meant to forecast economic performance through 2026 and into the “longer-run.” Some of the most significant changes we caught include: - The modal guess for 2023 U.S. GDP growth moved from 2.0%-2.1% to 2.6%-2.7%, an enormous change for a ~$25tn economy - PCE inflation expectations moved lower for every year, most notably in 2024, with core PCE expectations moving from a 2.5%-2.8% range to a nearly universal estimate of 2.3%-2.4% - The weighted average target range of the fed funds rate expected by all 19 FOMC members at the end of 2024 is now ~4.70%, implying a range of 4.5%-4.75%, which further implies 3 cuts of 25bps next year - 2024 expected GDP growth remains much lower than estimates for the current year, shifting to a lower and flatter range between 1.2%-1.7% And, there we have it—those last two bullets are arguably the real story, and, despite Mr. Market’s reaction, it might not be great news in the long term. I know, it’s crazy to think that markets would ever behave based on the short term, but the Fed seems to be implying rate cuts are going to come out of necessity, not just to grease the wheels of financial or housing markets. "... it’s crazy to think that markets would ever behave based on the short term ..." As usual, we can greatly over-analyze statements made by Chair Powell in the subsequent press conference in order to get more context around these updated projections. Some notable lines from Powell include: - “Recent indicators suggest that growth in economic activity has slowed substantially from the outsized pace seen in the third quarter. Even so, GDP is on track to expand around 2.5% for the year as a whole.” - [speaking on a soft landing outcome]... “This result is not guaranteed. It is far too early to declare victory.” - [speaking on reaching peak rates] “People generally think that we’re at or near that. And I think it’s not likely that we will, we’ll hike, although we don’t take that possibility off the table.” So, while Fed officials are still far from certain (as always), they seem to be at least less uncertain that inflation is on its way out and that a soft landing is possible. But, with that, Powell reaffirmed the very real possibility that the slowdown seen in the current quarter will turn into a recession down the line. Recessions typically come with rate cuts, so it’s certainly possible that we cut rates in order to spur economic growth when and if that time comes. Clearly, investors are seeking to take the W while we can, sending the Dow Jones Industrial Average to an all-time high at the close, crossing the 37k threshold for the first time and ending the day at 37,090.24. I’ll repeat—To. The. MOON. What's Ripe Vertex Pharmaceuticals (VRTX) $405.07 (↑ 13.23% ↑) - Apparently, Vertex has cured pain. And no, this time, it’s not in the creepy, evil Richard Sackler-OxyContin type of way. - The Boston-based giant of biopharma released very preliminary data suggesting that their new pill, VX-548, could have the potential to be a blockbuster, non-opioid pain medication. Industry experts have heard this claim approximately 72 trillion times before, however, so they remain skeptical. - The insane potential of non-addictive pain medication, unlike the one that the Sackler family intentionally addicted countless Americans to (*cough*, scumbags), is so huge that investors figure they gotta get in early. - Using an 11-point pain scale, the recently completed Phase 2 trial showed that over a 12-week period, the average patient reported a 2.26-point drop in overall pain. Using 11 as a frame of reference, that’s a ~20.8% fall, which, when it comes to pain, I think we’ll all take it. U.S. Steel (X) $38.59 (↑ 6.05% ↑) - The company behind Elon Musk’s favorite ticker symbol is doing the one thing Elon seems unable to do right now—attract investors. - We’re sure the $200bn man has no issue finding capital, but not in the way that multiple investors are throwing themselves at U.S. Steel right now. As the firm is officially on the block and ready to be sold, it’s already seeing more action above the key $40/sh bid price. - Both Cleveland-Cliffs, a U.S. miner and steel producer, and ArcelorMittal, a competitor out of Luxembourg (they can fit companies in that country?), have shown interest in the firm. Yesterday, the former upped its bid from $35/sh to $40 while the latter (allegedly) has all-cash financing to go up to $45/sh. - It’s a good, old-fashioned bidding war. Cleveland-Cliffs is looking to make the deal partly in cash with the rest in stock, but there are few things investors like more than getting paid more in cash than they know they’re worth. What's Rotten Pfizer (PFE) $26.66 (↓ 6.72% ↓) - After reaching an all-time high upon saving the world just over 2-years ago, Pfizer has fallen from grace to a fresh, new 10-year low. Tough look for the former “hot girl” vaccine company, or so I was told. - Pfizer tumbled on the day largely in response to weak revenue forecasts, primarily stemming from weaker demand for anything and everything C-19 related. The company expects a max revenue next year of $61.5bn while the Street has been pricing for $63.2bn. - But it got even worse on the bottom line for this one. Earnings forecasts were adjusted down to a range of $2.05-$2.25/sh, while analysts had been expecting ~$3.16/sh. Needless to say, investors generally aren’t huge fans when companies plan to make less money. Etsy (ETSY) $83.97 (↓ 2.16% ↓) - After Spotify got a big boost a few weeks ago on a big-time layoff announcement, Etsy must be pretty pissed they didn’t get the same treatment from markets. The only problem is that Spotify wasn’t actively undergoing its far-and-away busiest time of the year. - And that is what Etsy’s seeing right now. CEO Josh Silverman, who [looks way more like](=) he’s about to drop an elbow on you from the top rope rather than sell you a homemade pair of customized mittens, announced yesterday that the firm needs major restructuring during what he called a “very challenging” macro backdrop. - Naturally, the solution was to cut 11% of Etsy’s workforce, or ~225 employees. Investors might not have cared so much if this was done at literally any other time, but feeling the need to do this during peak season can’t exactly be a great sign. Or at least, that’s what markets expect as of now. Thought Banana And A Happy New Year? According to Bank of America, that headline is very up in the air… at least from a macro perspective. And, so is having a happy Holiday. On Tuesday, the second most valuable bank in America, Bank of America, released its monthly [Consumer Checkpoint]() report out of the firm’s in-house research institute. Basically, while we’re all out here wishing each other a Happy Holiday, BofA is concerned we’re creating some false hope. How could it be a Happy Holiday without at least a 7%-10% YoY increase in gifts under the tree? This key metric to annual happiness levels is allegedly coming under fire as America’s national pastime, spending money, is getting tougher and tougher. "... don’t get me wrong, spending on holiday items remains 1% above last year at the same time ..." Now, don’t get me wrong, spending on holiday items remains 1% above last year at the same time, according to BofA. Total card spending is only 0.5% higher than last year at this time, but that’s a helluva lot more preferable to the 0.5% decline we saw for October. As they’ve been doing for months, researchers at the bank are pointing out that wage growth has been slowing across the board and even dipping into the negative territory at times. But now, this slowdown in earnings has begun to coincide with spending restraints such as allocating resources to gift purchasing for your ungrateful friends and family, the resumption of student loan payments ~2 months ago, and ever-increasing costs for child and elder care. Further, Bank of America likes to separate out this spending data by age cohorts. Millennials and Zoomers (a.k.a. Gen Z)—the cohorts that saw (by far) the largest growth in earnings over the past few years—have also proven the most reluctant to spend this quarter, bringing up the rear in terms of spending growth. [image] [Source]() "It’s a positive sign, to say the least, that spending is continuing to grow." It’s a positive sign, to say the least, that spending is continuing to grow. However, this isn’t exactly a surprise to anyone. What matters is that spending hasn’t dipped into negative territory for more than 2 or 3 months in a row. That’s when we can start to get worried. But, seeing consumers eager to set money on fire across generations and recalling that wage growth has (somehow) managed to remain higher than inflation, this trend isn’t likely to change unless those costs outlined above become even more obscene. So far, the Happy New Year is on… but let’s just hope nothing changes that over the next few weeks. After all, SVB collapsed in a matter of hours… and never forget that oil prices went negative… anything is possible. The Big Question: Are you spending more or less this holiday szn? What will happen if consumer spending (which makes up over two-thirds of U.S. GDP) rapidly starts to decline? Is a recession incoming, and if so, how long will it last? Banana Brain Teaser Yesterday — At the local games evening, four lads were competing in the Scrabble and chess competitions. Liam beat Mark in chess, James came third, and the 16-year-old won. Liam came second in Scrabble, the 15-year-old won; James beat the 18-year-old, and the 19-year-old came third. Kevin is 3 years younger than Mark. The person who came last in chess came third in Scrabble, and only one lad got the same position in both games. Can you determine the ages of the lads and their positions in the two games? AnswerJames (15) Scrabble: 1st - Chess: 3rd Kevin(16) Scrabble: 4th - Chess: 1st Liam (18) Scrabble: 2nd - Chess: 2nd Mark (19) Scrabble: 3rd - Chess: 4th Today — Jessica is 11 years older than Joe. Joe is two years younger than Tina. Tina is 8 years old. Angela is half as old as Jessica, but George is 3 times as old as Angela. How old is George? Shoot us your guesses at vyomesh@wallstreetoasis.com Wise Investor Says “Buy high, sell higher” — Joe Terranova How would you rate today’s Peel? 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