Wednesday Morning Reads
- Don’t Mention the ‘T’ Word
- Aggressive U.S. Economic Support
- California’s ‘White Gold’ Rush
- California Is Awash in Cash
- Consumer Brands Eye Public Markets
- QuantumScape Defends Its Battery
- Keep Working From Home
- Warns of ‘Another Challenging Year’ Ahead
- $10.8 Billion Inheritance Tax
- The Scarcity of Money Myth
- Big Money Poll
The Fed's monetary policy-setting committee is expected to show exactly how patient it is this afternoon, revealing its thoughts on inflation, bond buying and risks to the financial system. While the FOMC isn't expected to adjust monetary policy at the April meeting, investors will be looking for whether the officials start "thinking about thinking about" tapering the pace of $120B+ monthly asset purchases. Most economists aren't expecting that to start until the central bank's June meeting at the earliest.
Bigger picture: Even talking about easing up on the Fed's purchases of Treasurys and mortgage-backed securities will be a delicate balance. In 2013, Fed officials triggered a "taper tantrum" in the bond market - which pushed yields on the 10-year Treasury up by half a percentage point in a month - when they started to indicate a reduction in asset purchases was on the horizon. That's something current Fed officials will be careful to avoid, as the higher interest rates would threaten the economic recovery.
In its last statement, the Fed said it would continue its pace of buying at least $80B of Treasury securities per month and at least $40B per month of MBS "until substantial further progress has been made toward the Committee’s maximum employment and price stability goals." So any indication that progress has been made towards those goals may be significant and could indicate that officials would consider moving up plans to adjust policy. Investors and economists will also be listening to how Fed Chair Jerome Powell characterizes inflation (and core numbers), which can be a sign that the economy is running too hot. Until this point, he has maintained that any spike in price increases will be "transitory."
Go deeper: Powell is likely to acknowledge that the economy is making progress given the far better than expected employment report in March, when the economy added 916,000 jobs vs. the 650,000 expected. Furthermore, jobless claims last week also hit a 13-month low, and while COVID vaccinations continue apace, the Fed Chair is likely to point out that the virus and its variants still pose a risk to the economic outlook. Overnight, the yield on the 10-year Treasury climbed 2 bps to 1.65%, the same level where the rate stood on the day of the last Fed meeting.
Major averages traded around the flatline on Tuesday, and similar sentiment was seen overnight. Dow and Nasdaq futures dipped 0.2%, while contracts linked to the S&P were marginally higher. Traders appear to be in wait-and-see mode before the big Fed meeting, as well as the latest slew of corporate earnings.
Quote: "Any clues offered in the board’s statement or in the subsequent press conference about potential QE tapering - when and how fast - would likely move both the stock and bond markets," Leuthold Group chief investment strategist Jim Paulsen declared. "Many FAANGs are [also] reporting this week and the stock market may wait until some of these key reports are out before deciding on its next major direction."
Others think Powell has the potential to rattle Wall Street if he sounds too hopeful. "The markets may end up reading too much into his optimism and not enough into the need for patience to see more data come through," said Morgan Stanley's Matthew Hornbach. "I'm expecting the chairman to frame it in that way. Great data, we just need a lot more of it."
Also on watch: The economic calendar today includes some high-profile earnings from manufacturing heavyweights like Boeing (BA) and Ford (F), as well as Big Tech names like Apple (AAPL) and Facebook (FB). At 9 p.m. tonight, President Biden will also unveil his "American Families Plan" at a joint address to Congress (see below). Expectations of massive stimulus and a booming economy have helped propel the stock market since Biden took office and have even resulted in the hottest 100-day performance since the 1950s. While there are many factors that go into market movement, the S&P 500 has climbed 24.1% since Election Day 2020.
President Biden's "Build Back Better" agenda will be on display this evening as he addresses the nation following his first 100 days in office. At the heart of the speech is the "American Families Plan," the second stage of a multi-trillion-dollar investment proposal. The first part, called the "American Jobs Plan," was released at the end of March and would be funded by a corporate tax hike. The bill is currently working its way through Congress, though the administration is prepared to push it through without GOP support.
Meet the "American Families Plan": The proposal is being referred to as an investment in so-called human infrastructure like child care, health care and education. It would be paid for by hiking taxes on the wealthiest 1% of Americans, most notably a near doubling of the capital gains tax rate on incomes above $1M to 39.6%. The top income tax bracket for households earning more than $400,000 is also expected to return to 39.6% (where it had been before the 2017 tax cuts).
As for the details of the bill, it would include free preschool for all three- and four-year-olds, and require that all pre-kindergarten teachers earn at least $15 per hour. It would also expand the Child Tax Credit through 2025, in addition to extensions for the Earned Income Tax Credit and subsidies in the Affordable Care Act. Paid family and medical leave are among other benefits, as well as education programs that include free community college.
Outlook: The White House has portrayed the plans as a Robin Hood-style endeavor to tax the rich in order to spend on the middle class and poor. A lot would need to be collected in order to pay for the two infrastructure proposals, which add up to a massive $4T. They also come on top of the $1.9T "American Rescue Plan" passed in early March to combat COVID-19. Legislative aides say Democrats plan to use reconciliation to move Biden's plans through Congress, but it remains unclear what pieces will make it through to the final package.
Net profits at Google parent Alphabet (GOOG, GOOGL) surged by a whopping 162% last quarter, while revenue soared 34% to a record $55.3B. Pandemic factors helped drive up earnings like coronavirus lockdowns, online shopping and YouTube watching. That led to lots of clicking on ads purchased by retailers, which have increasingly turned to digital commerce as people stopped coming through the door during COVID-19.
Movement: Alphabet gained as its board authorized the repurchase of up to $50B of stock. Shares climbed 4.2% to $2,400, or by nearly $100, following the Q1 results.
Microsoft (MSFT) is also doing tremendously well. The company reported fiscal Q3 revenue of $41.71B, up 19% on the year, as well as the company's largest quarterly revenue growth since 2018. "Over a year into the pandemic, digital adoption curves aren't slowing down. They’re accelerating, and it's just the beginning," said CEO Satya Nadella. The firm also posted strong growth in gaming and the cloud, and guided to the upside for FQ4 revenues.
Movement: The stock didn't put up the big gains seen at Alphabet. MSFT shares slipped 2.6% AH to $255, as Azure growth came in line with analyst estimates on a constant currency basis.
Nearly a week after losing a $2.9B contract to SpaceX (SPACE) - that would build the next spacecraft to land astronauts on the moon - Blue Origin (BORGN) has filed a protest against NASA's decision. The company had vigorously chased the contract, forming what it called a "national team" that included Lockheed Martin (NYSE:LMT) and Northrop Grumman (NYSE:NOC). The loss was also a big blow to Blue Origin founder Jeff Bezos, which recently announced his upcoming departure as Amazon (AMZN) CEO to focus on his space company and philanthropic ventures.
In a statement, Blue Origin called the decision "flawed" and said "NASA moved the goalposts at the last minute." "Their decision eliminates opportunities for competition, significantly narrows the supply base, and not only delays, but also endangers America’s return to the Moon." Musk responded by trolling Bezos on Twitter: "Can't get it up (to orbit) lol."
Flashback: SpaceX already beat Boeing (NYSE:BA) in the race to space under NASA's Commercial Crew program. The project was structured as a multi-tiered competition to get private sector companies to produce the most cost effective, innovative and safe way to get to the International Space Station. While SpaceX has already sent three missions to the ISS via its Crew Dragon capsule - and has been the first private entity to score NASA authorization for a commercial spacecraft system - Boeing's Starliner program has encountered issues during flight testing and manufacturing.
Go deeper: The Human Landing System (HLS) is an integral part of NASA's Artemis program, a new effort to return humans to the moon and an eventual mission to Mars. Blue Origin submitted plans for its Integrated Lander Vehicle, but it's far behind SpaceX even with regards to orbital transportation (flexibility, speed and culture are all said to have played a part in Musk's lead). Losing the latest contract risks Bezos' dreams of establishing Blue Origin as a desired partner for NASA or putting the company on the road to turning a profit. As for the HLS program, NASA requested $3.4B for the mission in fiscal year 2021, though Congress has so far only approved $850M.
What else is happening...
CDC eases outdoor mask guidelines for vaccinated people.
There are new ways for Instagram creators to make money.
Tuesday's Key Earnings
3M (NYSE:MMM) -2.6% as static guidance underwhelmed investors.
Alphabet (NASDAQ:GOOG) +4.2% AH as revenue vaulted 34%, operating income doubled.
AMD (NASDAQ:AMD) +3.7% AH doubling data center sales.
General Electric (NYSE:GE) -0.6% on lower sales, restructuring charge, price pressures.
JetBlue (NASDAQ:JBLU) -2.2% guiding for break-even status in Q3.
Microsoft (NASDAQ:MSFT) -2.6% AH following in-line Azure growth.
Pinterest (NYSE:PINS) -10.6% AH warning on user growth amid reopenings.
Raytheon (NYSE:RTX) +2.2% citing defense backlog and travel recovery.
Starbucks (NASDAQ:SBUX) -1.7% AH amid worries about international growth.
UPS (NYSE:UPS) +10.4% soaring after an earnings blowout.
Visa (NYSE:V) +1.3% AH returning to growth for credit transactions.
In Asia, Japan +0.2%. Hong Kong +0.4%. China +0.4%. India +1.5%.
In Europe, at midday, London +0.2%. Paris +0.5%. Frankfurt +0.4%.
Futures at 6:20, Dow -0.2%. S&P +0.1%. Nasdaq -0.2%. Crude +0.1% to $63.03. Gold -0.7% at $1765.70. Bitcoin -0.6% to $54184.
Ten-year Treasury Yield +2 bps to 1.65%
Today's Economic Calendar
7:00 MBA Mortgage Applications
8:30 International Trade in Goods (Advance)
8:30 Retail Inventories (Advance)
8:30 Wholesale Inventories (Advance)
10:00 State Street Investor Confidence Index
10:30 EIA Petroleum Inventories
11:00 Survey of Business Uncertainty
2:00 PM FOMC Announcement
2:00 PM Chairman Press Conference