Morning Reads
- Taking Toll on Poorest
- European Central Bank Prepares
- Recession? Stagflation?
- Soaring Oil Prices Force Biden to Engage
- White House Struggles to Talk About the ‘Problem From Hell’
- Powell’s Opinions on Inflation Matter, Not Biden’s
- U.S. Considering Reducing Tariffs
- SEC’s Revamp of Trading Rules Faces Criticism From Wall Street
- Wall Street’s Blank-Check Boom Has Gone Bust
- Jump in Mortgage Rates Could Add $100,000 to Housing Costs
- The Billionaires Behind a Push to Reinvigorate U.S. Chip-Making
- Twitter Said to Agree to Give Elon Musk Access
- Target CEO Says Unloading Excess Inventory Is a Necessary Pain
- Spirit Airlines Delays Shareholder Vote
- China Weighs Reviving Jack Ma’s Ant IPO
- Deloitte Explores Splitting
- Get In. We’re Going to Save the Mall
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The ECB's Governing Council meets today to decide on monetary policy, with the market expecting the central bank to end its net asset purchase program in June to set the stage for a rate increase in July. Translation: Until that asset purchase program ends, there's little chance of a rate hike. Last week's higher-than-expected Eurozone Consumer Price Index (at 8.1%) is also increasing pressure on the ECB to tamp down inflation, fearing that if it doesn't act now, things can quickly get out of control.
Bigger picture: "The key will be President Christine Lagarde's press conference and any clues around the likelihood of a 50-basis-point interest rate increase in July instead of 25 bps," Franklin Templeton's European trading desk wrote in a note. The ECB's policy rate is currently at -0.5% and analysts are pricing in almost 1.25% of rate hikes by the end of the year. That would be a big U-turn for Europe, which has been mired in eight years of negative interest rates.
Recall that as recently as January 2022, Lagarde wasn't mentioning the potential for rate increases and was defending the ECB's slow pace in removing accommodation compared to the rapid hiking cycle of the U.S. Federal Reserve. Today's projections are also likely to show that inflation won't drop below the ECB's 2% target through 2024, making officials even more nervous about tackling price pressures. The central bank was hesitant to remove stimulus as it assessed the fallout from the war in Ukraine, but it may no longer have a choice to avert further damage to the bloc's economy.
On watch: Investors will also be paying close attention to European bonds for repercussions from the winding down of the asset purchase program. The ECB has already purchased €4.9T of bonds, more than half the €8.8T of the assets that now sit on its balance sheet. In looking at industry sectors, higher bond yields and avoiding a recession should help banks, according to eToro strategist Ben Laidler, while a restrained hiking cycle that still supports financial conditions would help indebted industries like utilities. (4 comments)
Apple (NASDAQ:AAPL) unveiled a BNPL service during its Worldwide Developers Conference on Monday, but more details are emerging on how the business will be run. The "Pay Later" program will operate out of a wholly-owned subsidiary called Apple Financing LLC, which has the necessary state lending licenses to offer the feature. The new service will turn Apple into somewhat of a bank (though it doesn't have a charter) as it makes financial services a deeper part of its ecosystem.
How it works: Users will be able to split the cost of an Apple Pay purchase into four equal payments, spread over six weeks, with zero interest and no fees. The plan will be available everywhere Apple Pay is accepted - in app and online - while upcoming payments can be tracked via the Apple Wallet. If loans aren't repaid, Apple will no longer extend credit to those users, though the company said it won't report the missed payments to credit bureaus.
"Pay Later" will compete against similar offerings from Affirm (AFRM), Klarna (KLAR) and PayPal (PYPL), where it will earn interchange fees and valuable data from each transaction. Official BIN sponsor Goldman Sachs (GS) will give access to Mastercard's (MA) network, providing the ability to issue payment credentials directly. In the past, Apple has worked with Goldman to issue the Apple Card in the U.S., while partnering with Barclays (BCS) in the U.K. to offer financing for purchases of its devices.
iBank? Under the new program, Apple will handle credit checks, underwriting and lending, but is likely to continue to use licensed partners for its financial operations in the near future. Getting and maintaining a banking license would be a big headache for the company and may see it stray too far from its mission statement. To note, banking in general is a relatively low-margin business and Apple would be subject to severe regulations and reporting requirements, which could be considered a big risk for the tech giant. (9 comments)
The energy sector (XLE) clung to gains Wednesday and ended as the only winner in the S&P 500, with WTI crude oil rising to a 13-week high and settling above $122 a barrel. The gains follow U.S. government data that showed gasoline stockpiles declining for the tenth straight week, U.S. crude inventories rising unexpectedly and crude in the Strategic Petroleum Reserve falling by a record amount. As inflated prices continue to be seen at the pump, shares of Exxon Mobil (XOM) notched an all-time high for the first time since 2014, while Chevron (CVX) and Valero (VLO) posted similar records.
No top in sight: "If we continue consuming with the pace of consumption we have, we are nowhere near the peak, because China is not back yet," UAE Energy Minister Suhail Al-Mazrouei told an energy conference in Jordan. "China will come with more consumption."
While OPEC+ last week agreed to open the taps a little faster over the summer, it's a drop in the bucket in terms of output. In the past, the group has also struggled to hit its production targets, with Al-Mazrouei warning that without significant investment across the globe, OPEC+ would not be able to guarantee sufficient supplies. "We're lagging by almost 2.6M barrels a day and that's a lot."
Go deeper: Of the 23 nations in the OPEC+ alliance, only the Saudis and the UAE have some spare production capacity, but even with that, it will be tough to offset a supply gap created by the sanctions on Russia. "With the exception of two-three members, all are maxed out," added OPEC Secretary-General Mohammad Barkindo. "The world needs to come to terms with this brutal fact." (148 comments)
In response to recent mass shootings in Buffalo, New York, and Uvalde, Texas, the U.S. House of Representatives has passed a wide-ranging gun control bill by a mostly party-line vote of 223-204. The measure, called the Protecting Our Kids Act, followed emotional pleas for Congressional action at a hearing of the House Oversight and Reform Committee on Wednesday. According to the CDC, the leading cause of death among children and teens ages one through 18 is firearms (there were 3,219 such deaths in 2020, followed by motor vehicle traffic deaths, of which there were 2,882).
Among the proposals: a) Raising the age limit for purchasing a semi-automatic rifle or shotgun from 18 to 21, b) Prohibiting the sale of magazines with a capacity of more than 15 rounds, c) Setting federal standards for the safe storage of firearms, d) Imposing as many as five years in prison if a child accesses an unsecured gun and kills or hurts someone, e) Stronger laws against straw purchases or gun trafficking, and f) Building on executive actions by banning "bump stocks" and "ghost guns" that are assembled without serial numbers.
The continuous cycle of mass shootings in the U.S. has rarely prompted Congress to act against gun violence and this time is no different. The new bill has almost no chance of becoming law in the Senate, which is conducting its own discussions focused on improving school security, red flag laws, mental health programs and enhanced background checks. Support from 10 Republicans will be needed to get any bill signed into law, as is required for most legislation in the evenly divided Senate.
Sides of the aisle: "We can't save every life, but my God, shouldn't we try? America we hear you and today in the House we are taking the action you are demanding," said Rep. Veronica Escobar (D-TX). "The answer is not to destroy the Second Amendment, but that is exactly where the Democrats want to go," responded Rep. Jim Jordan (R-OH). Another exchange... "A person under 21 cannot buy a Budweiser. We should not let a person under 21 buy an AR-15 weapon of war," related Rep. Ted Lieu (D-CA). "This is unconstitutional and it's immoral. We're telling 18, 19 and 20-year-olds to register for the draft. You can go die for your country. We expect you to defend us, but we're not going to give you the tools to defend yourself and your family," countered Rep. Thomas Massie (R-KY). (3 comments)
Today's Markets
In Asia, Japan flat. Hong Kong -0.7%. China -0.8%. India +0.8%.
In Europe, at midday, London -0.4%. Paris -0.2%. Frankfurt -0.5%.
Futures at 6:20, Dow +0.2%. S&P +0.3%. Nasdaq +0.6%. Crude -0.3% to $121.69. Gold -0.3% to $1851.30. Bitcoin -5.5% to $29,911.
Ten-year Treasury Yield -2 bps to 3.01%
Today's Economic Calendar
8:30 Initial Jobless Claims
10:30 EIA Natural Gas Inventory
1:00 PM Results of $19B, 30-Year Note Auction
4:30 PM Fed Balance Sheet