Higher for (much) longer?
Federal Reserve officials have been saying that the path to achieving 2% inflation would be a bumpy one. Indeed. Inflation has come in hotter than desired for the first three months of 2024, meaning that “higher for longer” will continue to be priced in by investors. As such, don’t expect any change when the FOMC announces its monetary policy decision later today, and the expectation for a June rate cut, once the predominant view among market participants, also looks out of reach.
What it means: Policy will likely remain steady for the sixth and seventh straight Fed meeting – with the central bank holding the federal funds rate target range at 5.25% to 5.5%. In fact, over half of WSB subscribers don’t see any rate cuts in 2024, according to the most recent Survey Monday. The sentiment follows comments from Fed Chair Jay Powell earlier this month, which outlined that the Fed’s restrictive policy needed more time to work as the labor market remains strong and disinflationary dynamics have stalled.
U.S. stocks ended lower on the last day of April, dragged down by some disappointing earnings reports and economic data. Market participants were also being cautious a day ahead of the FOMC’s latest monetary policy decision. Since January, Fed officials have said they want to see more evidence that inflation is on a sustainable path to reach the central bank’s goal of 2% before they reduce rates, and so far, they haven’t received that evidence. See SA Analyst Roundtable: When will the Fed cut rates?
The balance sheet: There will also be a focus on the Federal Reserve’s plans to slow quantitative tightening during Powell’s afternoon presser. After the last FOMC meeting, Powell said the policymakers expected to reduce the rate of its balance sheet runoff “fairly soon,” which was backed up in the FOMC minutes released three weeks later. On average, securities have runoff at a rate of around $75B per month, less than its current cap of $95B per month, with the Fed’s total asset portfolio recently declining to $7.4T from about $9T in June 2022. (8 comments)
Cloud lift
Amazon (AMZN) climbed 1.3% AH to $177.20/share on Tuesday after posting better-than-expected Q1 results, including a beat from Amazon Web Services. However, gains were curbed by the e-commerce giant’s sales guidance. On the earnings call, CFO Brian Olsavsky shot down speculation that Amazon would join other tech powerhouses in initiating a dividend, but would instead stick with its philosophy of investing in growth initiatives, like going all in on generative AI. Investing Group Leaders Jonathan Weber and Ahan Vashi both applauded the strong quarter, but they have different takes on AMZN’s valuation. (17 comments)
AI content
OpenAI and Microsoft (MSFT) have been sued by a conglomerate of newspapers owned by investment fund Alden Global Capital for alleged AI infringement. Eight dailies were part of the lawsuit, including New York Daily News, Chicago Tribune and The Mercury News. The development comes a day after OpenAI signed a deal with the Financial Times to use its content to train AI models. Google (GOOG, GOOGL) has also reportedly closed a deal with News Corp. (NWSA) to pay the media company $5M-$6M per year to develop AI-related content and products. (17 comments)
Cannabis rescheduling
Pot stocks rose sharply late Tuesday on reports that the DOJ would reclassify marijuana as a less dangerous drug. Moving marijuana to the Schedule III category would make pot federally obtainable with a prescription, and pave the way for significant tax benefits for cannabis companies. Marijuana ETFs like YOLO and MJ soared over 20%, while shares of Canopy Growth (CGC) and Tilray (TLRY) surged 80% and 40%, respectively. The move might have also surprised WSB subscribers, who weighed in on the likelihood of rescheduling just two weeks ago. (39 comments)
