The Fed’s Focus On Real Rates

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In his Daily Market Notes report to investors, Louis Navellier wrote: 

Biggest Earnings Week

The biggest week of the earnings season is upon us. Plus the Fed’s next increase.

This week, 170 companies in the S&P are reporting, including multiple Megatechs, over 40% of the market value of the index. The NASDAQ also completes its rebalancing on its NASDAQ 100 index today by trimming the weights of the biggest names. Right in the middle of all these numbers the Fed will post their next increase on Wednesday and give comments as to whether this will be the last increase.

This morning, Chevron (NYSE:CVX) preannounced strong earnings, full earnings on Friday the 28th, and the stock is up 2%  (down 7% YTD). The indexes will definitely swing on the Megatechs, with the options market showing possible 5% swings in Alphabet and Microsoft, and 9% in Meta given the strong YTD returns and high P/E valuations.

Fed Real Rates

Regarding the Fed increase, there’s been comments regarding the Fed’s focus on “Real Rates”, the Fed Fund rate above inflation, where they have said they expected to have a 2.4% real rate in ’23, 2.1% in ’24, in order to bring inflation down to 2% and keep it there. Currently, the real rate is only 1.3% (5.1% Fed Funds -3.8% Inflation expectations).

In the long run, they want a 0.5% real rate. They get there by both having inflation fall and keeping rates in front of where it’s going. This leaves a valid argument that there could actually be another 50bps in increases to get to these high real rates unless inflation marches down quickly, which may keep the tension high if Powell reiterates this perspective this week.

Today, the Purchasing Managers Index came in at the lowest rate since Feb’23, below the forecast, while the Manufacturing Purchasing Managers Index came in at the highest since Apr’23, well above expectations. At the same time, the S&P Global Composite PMI was below forecast, the lowest since Feb’23. While inflation is showing a lower trend it’s also largely unpredictable month to month.

The major stock indexes are all green this morning, with the Dow on track for its 11th up day in a row, the longest run since February ’17. Interest rates are flat, gold a little lower, crude oil a little higher, the US dollar index has climbed back to 101, a 2-week high, and high yield is higher, as is the VIX though still sub-14 near the low of the year. In other news, Twitter has renamed itself “X” as part of Elon Musk’s plan to expand the functionality of the website to soon include payments and banking, in addition to messaging.

Get ready for the most meaningful week of the earnings season.  

Coffee Beans: No Boundaries. 

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