Morning Reads
- China Is Miles Ahead in a Pacific Race for Influence
- China’s Economic Downturn Shows Signs of Easing
- Global Oil Refiners Falter in Efforts to Keep Up with Demand
- Oil Surge Fans Inflation Fears, Dampens Stocks
- Biden Pledges to Back Fed in Effort to Combat High Inflation
- Treasury Market Faces Liquidity Risks as Fed Pares Balance Sheet
- Wall Street’s Losing Streak Ends
- After a Bumper 2021, Companies Might Struggle to Increase Profits
- States Help Business Owners Save Likely More Than $10 Billion in Federal Taxes
- Summer Worker Shortage
- U.S. Wheat Crop Hit by Dry Winter\
- US Meat Prices Surge \
- Unilever to Add Activist Investor Nelson Peltz to Board
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President Biden is scheduled to meet later today with Fed Chairman Jerome Powell, who was formally sworn in last week for a second term as head of the U.S. central bank. The rare meeting at the Oval Office will focus on inflation and the state of the economy, as prices continue to soar on everything from gasoline and food to transportation and housing. While the Fed has embarked on a cycle of aggressive rate hikes and trimming its massive balance sheet, many have criticized the central bank for being too slow in addressing the price pressures, while others say moving too severely could trigger a recession (or that the U.S. economy is already in one).
Snapshot: On Friday, data from the Commerce Department showed that personal consumption expenditures, the Fed's favorite inflation gauge, rose 6.3% in April from a year earlier. While that was a deceleration from the 6.6% pace seen in the previous month, it's still more than three times the central bank's inflation target of 2%. Meanwhile, the more closely-watched inflation gauge, the consumer price index, inched down to 8.3% in April (from 8.5% in March), but is still at its highest level since the early 1980s.
A Memorial Day op-ed from President Biden flagged the current high-priced environment, calling it America's "top economic challenge right now." In the article, he described that the "Federal Reserve has a primary responsibility to control inflation" and outlined the importance of the institution's independence, but laid out a three-part plan of things that can be done on the fiscal and executive side. Will it work?
The strategy: 1) "The price at the pump is elevated in large part because Russian oil, gas and refining capacity are off the market. We can't let up on our global effort to punish Mr. Putin for what he's done, and we must mitigate these effects for American consumers. That is why I led the largest release from global oil reserves in history. Congress could help right away by passing clean energy tax credits and investments that I have proposed."
2) "We can also reduce the cost of everyday goods by fixing broken supply chains, improving infrastructure, and cracking down on the exorbitant fees that foreign ocean freight companies charge to move products. My Housing Supply Action Plan will make housing more affordable by building more than a million more units, closing the housing shortfall in the next five years. We can reduce the price of prescription drugs by giving Medicare the power to negotiate with pharmaceutical companies and capping the cost of insulin. And we can lower the cost of child and elder care to help parents get back to work."
3) "We need to keep reducing the federal deficit, which will help ease price pressures. Last week the nonpartisan Congressional Budget Office projected that the deficit will fall by $1.7T this year - the largest reduction in history. My plan would [also] reduce the deficit even more by making common-sense reforms to the tax code. The Internal Revenue Service should have the resources to collect taxes that Americans already owe. We should level the international taxation playing field so companies no longer have an incentive to shift jobs and profits overseas." (52 comments)
Fresh supply concerns in world energy markets sent WTI crude futures (CL1:COM) up 3.5% overnight to $119 per barrel for the first time since March, when sanctions began to target Russia for its invasion of Ukraine. Brent crude (CO1:COM) already touched the new symbolic $120 level on Monday, while U.S. gasoline prices surged to another record, dealing a fresh blow to consumers ahead of the summer driving season and peak energy demand. The national average for a gallon of gas is now hovering around $4.62, according to AAA, as millions of Americans come back from their Memorial Day outings and holiday getaways.
Next shakeup: EU leaders have reached an agreement to ban 90% of Russian crude by the end of the year as part of a sixth sanctions package the bloc is putting together against Moscow. Seaborne deliveries of Russian oil would be forbidden under the new arrangement, though it would include a temporary exemption for pipeline transfers until a solution is found that would meet the energy needs of Hungary and other landlocked countries like Slovakia and the Czech Republic. "This immediately covers more than 2/3 of oil imports from Russia, cutting a huge source of financing for its war machine," tweeted European Council President Charles Michel. "Maximum pressure on Russia to end the war."
However, questions are swirling about the effectiveness of the ban, with more Russian oil than ever on board tankers heading to India and China. That crude is now trading at around $90 a barrel, significantly cheaper than the price of Brent or West Texas Intermediate. Estimates vary on how much it costs Russia to produce a barrel of oil, but with Russia's energy minister deeming crude prices of $55-70/bbl as "optimal" just days before the war, Russia still appears to be making big profits on its sales as long as it can keep finding buyers.
More energy worries: OPEC+ is scheduled to meet on Thursday, but the producer group still looks set to rebuff Western calls for speeding up increases to their oil output. Markets are also on edge after the Iranian Navy seized two Greek tankers in retaliation over the confiscation of Iranian crude by the U.S. from a tanker held off the Greek coast. "This raises the specter of further disruptions to oil flows through the Strait of Hormuz, which carries a third of the world's trade," ANZ Research analysts wrote in a research note. Meanwhile, Denmark and Netherlands are set to join Bulgaria, Poland and Finland in having their gas supplies turned off by Russia after the two nations rejected Moscow's demands to make payments in rubles. (6 comments)
The theater industry may be in for a comeback after Paramount's (NASDAQ:PARA) Top Gun: Maverick brought in $156M at the North American box office to notch the best Memorial Day weekend of all-time. The film garnered another $124M internationally (with Monday's numbers still being tabulated) despite not playing in key overseas markets like Russia and China. That'll translate into some nice profits for a flick that cost about $150M to make, and was delayed multiple times throughout the pandemic to ensure that it was released with a bang on the big screen.
Quote: "We've always believed in theatrical [releases] and this just confirms it," said Marc Weinstock, Paramount's head of worldwide marketing and distribution. "Theatrical is not dead - this is a great business."
Starring in the action-thriller was seasoned stuntman Tom Cruise, who took several decades to appear in a sequel of the popular 1986 film that made him one of Hollywood's biggest actors. The film also marked Cruise's first opening to top $100M (his previous record was $65M) and some have even called the production superior to the original movie. The opening-day total of $51.8M was a Paramount Pictures' record (beating 2010's Iron Man 2), while the four-day holiday weekend marked the studio's biggest payoff since Transformers: Age of Extinction was released in 2014.
Outlook: Theaters are hoping to see a revival this summer as audiences take a break from streaming and the coveted older demographic slowly returns to cinemas. Some are even betting big on the sector, like Warren Buffett, whose Berkshire Hathaway amassed a $2.6B stake in Paramount during the first quarter. "The performance of Top Gun: Maverick is a stunning reminder that when you combine one of the last genuine movie stars with great old fashioned storytelling, audiences of all ages will rush out to the theater to be a part of the communal bigger than life moviegoing experience," added Paul Dergarabedian, senior media analyst at Comscore. (61 comments)
While many were trying to take time off over the holiday weekend, others were busy getting active. Nelson Peltz of Trian Fund Management has been added to the board at Unilever (NYSE:UL) as the company engages with the activist investor to revive its performance. Peltz will take on the role of non-executive director from July 20, and will also be added as a member of Unilever's compensation committee.
Backdrop: Trian took a 1.5% stake in Unilever back in January, scooping up 37.4M ordinary shares that made it the company's fifth-largest shareholder. At issue was years of poor returns for investors, especially during COVID lockdowns that should have benefited the company, as well as an increasing emphasis on sustainability over returns. The last blow was a failed effort to buy the consumer division of GlaxoSmithKline (GSK), which angered some shareholders who were already upset about management.
"Unilever has a double problem: structurally low growth categories, and a loss of investor confidence regarding management and the board," Bernstein analysts led by Bruno Monteyne wrote in a note, adding that Peltz's appointment gives the firm "a huge amount of credibility." In fact, shares of Unilever are up more than 7% in premarket trade, which is a notable difference when compared to the 15% loss experienced since Alan Jope became CEO in 2019.
Go deeper: Peltz has previously mounted activist campaigns at Unilever's rivals, serving on the boards of Heinz (KHC), Mondelez (MDLZ) and Procter & Gamble (PG), but has since relinquished all of those roles. "We look forward to working collaboratively with management and the Board to help drive Unilever's strategy, operations, sustainability, and shareholder value," Peltz announced following his latest intervention. Unilever is one of the biggest consumer groups in the world, owning brands like Dove soap, Ben & Jerry's and Hellmann's mayonnaise. (1 comment)
Today's Markets
In Asia, Japan -0.3%. Hong Kong +1.4%. China +1.2%. India -0.9%.
In Europe, at midday, London +0.3%. Paris -0.9%. Frankfurt -0.8%.
Futures at 6:20, Dow -0.7%. S&P -0.7%. Nasdaq -0.4%. Crude +3.5% to $119.08. Gold -0.2% to $1853.20. Bitcoin -3% to $31,505.
Ten-year Treasury Yield +7 bps to 2.82%
Today's Economic Calendar
9:00 S&P CoreLogic Case-Shiller Home Price Index
9:00 FHFA House Price Index
9:45 Chicago PMI
10:00 Consumer Confidence
10:30 Dallas Fed Manufacturing Survey
3:00 PM Farm Prices
Companies reporting earnings today »
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Chevron's (CVX) Venezuela license renewed under same restrictions.
Strategy shift? Biden hunts for oil refining capacity in America.
Top 25 stocks that are down big but have improving earnings - Credit Suisse.
Musk: Bill Gates still has a 'multi-billion dollar' Tesla (TSLA) short position.