Consumer Sentiment, Rate Cuts, and the Worst of the Magnificent Seven
Editor’s Note: Yeehaw, it’s Wednesday again!
Consumer Sentiment on the Rise
According to the University of Michigan, U.S. consumer sentiment is on the rise, supported by hopes that inflation will continue to wane.
The university’s consumer sentiment index increased from 76.5 earlier last month to 79.4 at the end of March. That’s the highest reading since back in mid-2021, when the COVID pandemic recovery was in full swing.
A poll of economists made by Reuters indicated that the consensus had expected sentiment to remain flat, at 76.5.
In addition, the 2.9-point increase was the biggest same-month rise since August 2022.
According to the university’s survey, over the next year, American consumers now expect prices to rise at a rate of 2.9%. That’s better than the 3% increase consumers predicted in the middle of the month.
Over the next five to 10 years, consumers expect costs to rise by only 2.8% — the lowest percentage since last fall.
“Not only did inflation expectations fall sharply, so did inflation uncertainty,” survey director Joanne Hsu said in a statement. “As such, consumers are now broadly in agreement that inflation will continue to slow both over the short term and the long term.”
According to Hsu, consumers are waiting to see how this year’s presidential elections progress for a better view of the economy. According to the report, both registered Democrats and Republicans are feeling rather optimistic about the economy in the short to medium term. However, confidence among independent voters has slipped.
In addition, consumer sentiment about current personal finances jumped to the highest level in more than two years.
“Critically, consumers exhibited confidence that inflation will continue to soften,” Hsu said. “Assessments and expectations of personal finances improved modestly from last month, as the perceived negative effects of high prices and expenses on living standards eased.”
USPS Ends Its FedEx Contract
Yesterday, the United States Postal Service (USPS) announced that the United Parcel Service (NYSE: UPS) will replace FedEx (NYSE: FDX) as its primary air cargo provider.
According to UPS, this award is “significant.”
The USPS has long been FedEx’s largest Express service customer. However, FedEx sought to renegotiate the terms of its contract, which is set to expire at the end of September.
Because FedEx was unable to secure more favorable terms, it walked away from its 22-year relationship with USPS.
The loss of the USPS contract could cost FedEx approximately $2 billion in annual business. However, according to analysts, this will force the shipping company to reduce its air-delivery capacity, which will lead to cost-cutting.
In recent years, the USPS has depended less on FedEx’s air delivery services as it looks to cut its own costs. In its fiscal 2020, USPS paid FedEx $2.4 billion. That shrank to roughly $1.73 billion in the fiscal 2023.
On the news, shares of UPS shot up. However, this wasn’t enough to reverse the more than 23% loss UPS’s stock has seen in the last 12 months. UPS has been on a downswing ever since it trimmed its sales outlook last year. A global slowdown in shipping demand led the company to lower its revenue forecast.
At the same time, FedEx’s stock has risen by more than 26% in the last 12 months. The company’s cost-cutting programs have helped boost profits at the shipping giant.
No Fed Rate Cut in May
According to the CME Group’s FedWatch tool, the futures market is pricing in a more than 97% chance that the central bank’s Federal Open Market Committee (FOMC) will hold its benchmark rates steady at its May meeting.
This is a change from earlier months, when a May rate cut seemed probable.
However, inflation has proven to be sticky. Although price growth has slowed, it remains higher than the Fed’s 2% year-over-year target.
This week, Cleveland Fed President and FOMC member Loretta Mester said that, although she’s expecting the central bank to cut rates at some point this year, it’s not happening in May.
She noted that the Fed has made progress in taming inflation. However, the Fed’s work may not be finished.
“I continue to think that the most likely scenario is that inflation will continue on its downward trajectory to 2% over time,” Mester said at an event in Cleveland yesterday. “But I need to see more data to raise my confidence.”
She added that further readings of inflation gauges such as the Personal Consumption Expenditures (PCE) Index — the Fed’s favored metric — will be needed to determine whether the higher-than-expected inflation rates that have been reported this year were just anomalies or signals that the Fed’s battle is “stalling out,” as she put it.
“I do not expect I will have enough information by the time of the FOMC’s next meeting to make that determination.”
In addition, Mester said that she expects the FOMC to keep the long-run federal funds rate at 3%, rather than 2.5%. At this level, policy is considered “neutral” — neither stimulative nor restrictive.
“At this point, we are seeking to calibrate our policy well to economic developments so we can avoid having to act in an aggressive fashion,” she said.
The Fed’s current benchmark overnight borrowing rate is in a range of between 5.25% and 5.5%. It’s been there since July 2023.
Currently, fed futures traders expect the FOMC to cut rates by 75 basis points by the end of the year. The first 25-basis-point cut is now expected at the Fed’s June meeting.
San Francisco Fed Head Mary Daly said yesterday that three rate cuts still appear “very reasonable” in 2024 — but there’s no guarantee.
“Three rate cuts is a projection, and a projection is not a promise,” Daly said. “We’re getting there, but it’s not going to be tomorrow, but it’s not going to be forever.”
The Dreadful Two of the Magnificent Seven
Last year, the so-called “Magnificent Seven” ruled the U.S. stock markets. These Big Tech giants — Alphabet (NSDQ: GOOGL), Amazon (NSDQ: AMZN), Apple (NSDQ: AAPL), Meta Platforms (NSDQ: META), Microsoft (NSDQ: MSFT), Nvidia (NSDQ: NVDA), and Tesla (NSDQ: TSLA) — enjoyed the reversal of an earlier trend that sent speculative tech stocks sinking.
However, this year, two of the Magnificent Seven stocks have turned into major losers: Tesla and Apple.
In the first quarter of 2024, shares of these companies plunged by 29% and 11%, respectively. That caused the broader S&P 500 to lose 1.3 percentage points.
Take a look:
You will find more infographics at Statista
What’s more, given uncertainties about Apple’s future and Tesla’s lackluster delivery counts, these two stocks could be in for an even rougher ride during the rest of 2024.
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