The word of the day is "pause", and it is all over the news. Last night the US central bank raised rates by a quarter point as planned, while easing its stance. Fed Funds rates rose in the 5-5.25% range and Jerome Powell hinted at a pause in monetary tightening.

Specifically, the Fed said (hang on, it’s long) “In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” Investors immediately translated this into “The Fed will pause rate hikes". Futures contracts show that the market is even overwhelmingly (by a narrow margin, 50.7%) anticipating a quarter-point rate cut at the meeting scheduled for July 25-26. And even three more cuts between now and next January. One part of the market seems to think it has reached its famous "pivot", i.e. the tipping point between a restrictive and an accommodating monetary policy.

Except, the fiesta didn't happen.US equity markets lost ground yesterday after Jerome Powell's speech. No big drops, but declines of 0.6% to 0.8% for the Nasdaq, S&P and Dow Jones. This is because Powell also stressed yesterday that the battle against inflation is not yet won and that further tightening of monetary policy may be warranted. As usual, we should not jump to conclusions and I often write that we need the dust to settle around these events to get the gist of them. This time is no different. The bond market, which is notoriously more reasonable than the stock market, has reacted in a visibly more rational manner: the yield on the US 10-year bond has fallen a few points to 3.34%. It does not yet believe in a rate cut.

The other thing that is bugging investors is the continued bleeding in the US banking sector. After First Republic’s wound was cauterized by US authorities and JPMorgan Chase, the new wound is Pacwest Bancorp, a Los Angeles bank that has lost 80% of its value in three months and, as I write, is plunging another 50% after announcing last night that it was considering its rescue options. I have a feeling that there won't be a single bank left in California any time soon. Pacwest remains a small player, but bigger fish continue to bleed. Comerica, Zions and Truist, which I mentioned yesterday, have continued to slide on the session. This is part of the explanation for the lag between futures and the rest of the market: some investors believe that the Fed will be forced to ease the pressure in the short term to stabilize the banking sector.

All of this US news overshadows the day's other events. Earlier, China's Caixin manufacturing PMI confirmed that the former Middle Kingdom is struggling to recover: it was in contraction territory in April. The European Central Bank also just decided to raise its rates by 25 basis points, supported by a slightly higher than expected April inflation reading.

On the corporate side, Thursday is traditionally the busiest day of the week during earnings season, and this May 4 is no exception, with Apple due to report its results after the close. Yesterday Qualcomm (-6.5% in the after-hours) confirmed that the outlook for the smartphone sector and the semiconductor industry as a whole is currently less than rosy.

In other news, new data released this morning shows the number of Americans filing new jobless claims rose last week by 13,000 to a seasonally adjusted 242,000, in line with expectations.

 

Economic highlights of the day:

Refined versions of the April services PMI indicators in the major economies are expected throughout the day. In the US, the Challenger layoff survey and weekly jobless claims are on the agenda. All the agenda is here. 

The dollar is up 0.4% to EUR 0.9074 and is flat against the pound at GBP 0.7960. The ounce of gold rebounds to USD 2038. Oil remains low, with North Sea Brent at USD 72.84 a barrel and US WTI light crude at USD 68.89. The yield on US 10-year debt falls 14 points to 3.41%. Bitcoin is trading around USD 29,000.

 

In corporate news:

  • Pacwest Bancorp said late Wednesday it was in talks with potential partners and investors about strategic options, after the Los Angeles-based bank's stock and several other U.S. regional banks fell on fears of another bank failure.
  • Western Alliance - The bank said Wednesday that it had not experienced any unusual deposit outflows following the sale of First Republic Bank's assets to JPMorgan, and that its total deposits were $48.8 billion on Tuesday, up from $48.2 billion on Monday.
  • Moderna on Thursday reported better-than-expected quarterly sales for its COVID-19 vaccine and earnings of 19 cents a share, compared with analysts' expectations of a loss of $1.77 a share. The stock gained 2.5% in premarket trading.
  • Regeneron on Thursday disappointed estimates for quarterly sales of its blockbuster macular degeneration drug Eylea amid increased competition. The stock lost more than 3% in premarket trading.
  • Kellogg on Thursday forecast a smaller-than-expected decline in annual profit and raised its full-year revenue forecast, boosted by multiple price increases and steady demand for its products.
  • Paramount on Thursday reported lower-than-expected quarterly revenue of $7.27 billion as it lost subscribers to its streaming service and reduced spending by advertisers amid a tough economy. The stock is down almost 6% in premarket trading.
  • Qualcomm reported lower-than-expected third-quarter revenue and profit on Wednesday, saying the smartphone industry will take longer to use up excess chips before new orders come in.
  • ConocoPhillips raised its full-year production forecast after beating estimates for its quarterly profit as higher oil production offset the impact of lower prices.
  • Alibaba - Alibaba's global online shopping division is considering an initial public offering in the U.S., Bloomberg reported Thursday, citing people familiar with the matter.
  • MetLife missed estimates for first-quarter profit as economic uncertainties hurt the insurer's investment gains, which fell 8 percent to $4.6 billion.
  • Meta - The French competition authority on Thursday asked Facebook's parent company to suspend the application of criteria put in place last January for advertising verification and to define new criteria within two months to ensure competition.
  • Ford - The group's chairman said on Wednesday that price cuts in the electric vehicle market were "a worrying trend" after the US carmaker slashed prices for its Mustang Mach-E in response to a series of cuts by rival Tesla
  • Tesla - Consulting firm ISS on Wednesday recommended Tesla investors vote against the re-election of chairman Robyn Denholm, citing a lack of oversight when some shares were used by chief executive Elon Musk and his brother Kimbal Musk as collateral for loans.
  • Callon Petroleum said Wednesday it will acquire Permian Basin-based Percussion Petroleum Operating in a deal valued at about $475 million to strengthen its U.S. shale portfolio.
  • HF Sinclair - The oil refiner's first-quarter profit beat estimates on Thursday, supported by higher margins on tight global supply and robust demand.
  • Apollo, Arconic - The U.S.-based company announced Thursday that it was being acquired by private equity firm Apollo in a deal valued at about $5.2 billion.
  • Exxon failed to meet its insurance obligations for the Liza One offshore oil project in Guyana, partly because of errors by the environmental regulator, a Guyanese court ruled Wednesday, a decision rejected by the government.

Analyst recommendations:

  • AMD: Craig-Hallum Capital Group upgrades to buy from hold. PT up 11% to $100.
  • Avis Budget: Susquehanna Financial lowers PT to $195 from $240. Maintains neutral rating.
  • Clorox: RBC Capital Markets raised PT to $151 from $137. Maintains sector perform rating.
  • Coca-Cola Hellenic: Jefferies remains Buy with a price target raised from GBp 2800 to GBp 3000.
  • Comerica: Wolfe Research downgrades to peerperform from outperform.
  • Estee Lauder: Consumer Edge Research lowers PT to $210 from $250. Maintains equal-weight rating.
  • Flutter: Wells Fargo upgrades from Overweight to Overweight in line targeting GBp16,600.
  • Hersha Hospitality: B Riley Securities upgrades to buy from neutral. PT up 50% to $9.
  • Ionis Pharma: Citi upgrades to neutral from sell. PT up 3.7% to $36.
  • Marriott International: Bernstein upgrades to outperform from market perform. PT up 14% to $204.
  • Repligen: RBC Capital Markets lowers PT to $157 from $170. Maintains sector perform rating.
  • Starbucks: Accountability Research upgrades to buy from hold. PT up 5.7% to $121.
  • Werner Enterprises: Stephens raised its recommendation to overweight from equal-weight. PT up 19% to $55.
  • Zimmer Biomet: BofA Global Research upgrades to neutral from underperform. PT up 12% to $160.