Portfolio Update – June 2024

General news

• On 01/06/2024, Inflation rose as anticipated in April, leaving markets uncertain about the timing of potential interest rate reductions, according to a key measure released by the Commerce Department and closely monitored by the Federal Reserve. The personal consumption expenditures (PCE) price index, excluding food and energy, increased by 0.2%, matching Dow Jones estimates, with an annual rise of 2.8%, slightly above expectations. Including food and energy, the PCE inflation stood at 2.7% annually and 0.3% monthly, aligning with forecasts. The Federal Reserve favors the PCE index for its broader scope and consideration of consumer behavior over the consumer price index (CPI). Economist Dan North noted the persistently high core PCE, suggesting it might concern Fed Chair Jerome Powell. Energy prices rose by 1.2%, while food prices fell by 0.2%. Goods prices increased by 0.2%, and services by 0.3%. Additionally, personal income rose by 0.3%, in line with expectations, but spending grew by only 0.2%, below the forecast, and showed a slight decline when adjusted for inflation.
• Japan spent a record 9.79 trillion yen ($62 billion) between April and May to slow the yen’s rapid depreciation against the U.S. dollar, confirming market suspicions of government intervention. This surpasses the nearly 9.2 trillion yen spent on similar operations in late 2022. The intervention came amid sudden yen spikes in late April and early May, with authorities employing stealth tactics to keep traders uncertain. Japanese officials have consistently emphasized the need for stable currency movements that reflect economic fundamentals. The dollar’s abrupt drop from 160 yen to 154 yen in April, followed by a fall from 157 yen to 153 yen after the U.S. Federal Reserve’s policy decision in May, fueled intervention speculation. Despite these efforts, analysts expect any impact to be temporary, as the dollar continued to trade around 157 yen on Friday. Persistent yen weakness, exacerbated by a significant interest rate gap between Japan and the U.S., remains a concern, inflating import costs and affecting the economy. The Bank of Japan’s recent interest rate hike has yet to reverse this trend, with the yen also weakening against the euro due to the European Central Bank’s rate increases.
• In May, euro zone inflation rose to 2.6%, up from 2.4% in April, according to Eurostat. Despite this higher-than-expected increase, market expectations of an interest rate cut from the European Central Bank (ECB) next week remain unchanged. Core inflation, which excludes volatile items such as energy and food, also rose to 2.9% from 2.7%, contrary to economists’ forecasts of no change. The ECB is anticipated to cut interest rates by 25 basis points at its June 6 meeting, marking the first reduction since 2019. This follows a series of rate hikes that began in July 2022, bringing rates to 4%. Market consensus holds firm on the expected cut, with predictions of only one more reduction in 2024. While headline inflation has decreased from its peak of 10.6% in October 2022, recent fluctuations are expected due to energy market base effects and the phasing out of fiscal support. Notably, services inflation, a critical domestic pressure indicator, increased to 4.1% from 3.7%, likely drawing ECB attention.
• On 03/06/2024, OPEC+ has agreed to extend its significant oil output cuts into 2025 to support the market amid sluggish demand growth, high interest rates, and increasing U.S. production. Recently, Brent crude prices have hovered around $80 per barrel, below the levels needed by many OPEC+ members to balance their budgets. Concerns over slow demand growth in China, the largest oil importer, and rising oil inventories in developed economies have pressured prices. Since late 2022, OPEC+, which includes Russia, has implemented a series of deep output cuts. Currently, the group is reducing output by 5.86 million barrels per day (bpd), about 5.7% of global demand. This includes 3.66 million bpd of cuts set to expire at the end of 2024, and additional voluntary cuts by eight members totaling 2.2 million bpd, which were initially set to expire at the end of June 2024.
• On 04/06/2024, The FDIC’s report on the banking industry raises concerns despite some positive signs. Loan demand is down, delinquencies are rising, and the number of “problem banks” is increasing. This comes even as deposits, both insured and uninsured, are growing slightly. The rise in uninsured deposits is particularly noteworthy as it hasn’t happened in over a year. The FDIC chair downplayed the increase in problem banks, saying it’s within the normal range. However, the overall trend suggests potential vulnerabilities in the banking system, highlighting the importance of transparency regarding where funds are held and how easily they can be accessed.
• Interest rate relief is on the horizon for borrowers in Europe and Canada. The European Central Bank (ECB) and Bank of Canada (BoC) are expected to cut rates this week due to recent drops in inflation. The ECB is nearly certain to lower its rate on Thursday, while the BoC has an 82% chance of a cut on Wednesday. These moves would make them some of the first major central banks to loosen policy after the Swiss National Bank’s rate cut in March. However, the future of interest rates remains uncertain as inflation might be stickier than expected. The ECB is unlikely to provide clear guidance beyond June, opting to take a data-dependent approach in the coming months.
• On 05/06/2024, Australia’s economy grew by 0.1% in the first quarter of 2024 and by 1.1% over the year, as reported by the Australian Bureau of Statistics (ABS). Treasurer Jim Chalmers attributed the sluggish growth to higher interest rates, persistent inflation, and global uncertainty but highlighted that Australia fared better than many comparable countries. He noted that while many OECD economies recorded negative quarters, Australia avoided this and achieved faster annual growth than countries like Canada, Italy, the UK, Japan, and Germany. However, Katherine Keenan, ABS head of national accounts, pointed out that this marked the lowest annual growth since December 2020, with economic activity per person declining for the fifth consecutive quarter, dropping 0.4% in the March quarter and 1.3% over the year.
• On 06/06/2024, In May, private sector job creation slowed significantly, with only 152,000 jobs added, falling short of the revised 188,000 jobs in April and the Dow Jones estimate of 175,000, marking the lowest monthly total since January, according to ADP. Pay growth remained steady at 5% annually for the third consecutive month. ADP’s chief economist, Nela Richardson, noted a deceleration in both job and pay growth, indicating potential weaknesses in the labor market, particularly among producers and consumers. The services sector led job gains, adding a net 3,000 positions, with significant contributions from trade, transportation, and utilities (55,000 jobs), education and health services (46,000 jobs), and construction (32,000 jobs). However, manufacturing lost 20,000 jobs, and other sectors such as natural resources and mining (-9,000), information (-7,000), and professional and business services (-6,000) also saw declines, while small businesses with 20 to 49 employees reduced their workforce by 36,000 jobs.
• The Bank of Canada (BoC) reduced its key policy rate by 25 basis points to 4.75% on Wednesday, the first cut in four years, with further easing likely if inflation continues to decline. Economists predict another cut in July following this widely anticipated move. After maintaining a 5% rate for nearly a year, the BoC cited positive indicators for underlying inflation. Governor Tiff Macklem emphasized that with sustained evidence of easing inflation, restrictive monetary policy is less necessary. Despite this, financial markets only priced in a 35% chance of a further cut to 4.50% next month. Following the announcement, the Canadian dollar weakened by 0.4% against the U.S. dollar. The BoC’s decision aligns with recent rate cuts by Sweden’s Riksbank and the Swiss National Bank, aimed at alleviating economic pressures on households and businesses amid easing inflation.
• On 07/06/2024, The European Central Bank (ECB) confirmed a widely anticipated reduction in interest rates, bringing its key rate down to 3.75% from 4%, where it had been since September 2023, despite ongoing inflationary pressures in the 20-nation euro zone. The ECB stated that moderating monetary policy restriction was appropriate based on a reassessment of the inflation outlook and the effectiveness of policy transmission. In its updated projections, the ECB raised the 2024 inflation forecast to 2.5% from 2.3%, and the 2025 forecast to 2.2% from 2%, maintaining the 2026 projection at 1.9%. While money markets had anticipated the 25 basis point cut at the June meeting, it was the first reduction since September 2019. Economists predict only one more cut this year, with a follow-up cut in July now unlikely due to the latest figures. Dean Turner from UBS Global Wealth Management suggested September as the next potential cut. This move places the ECB ahead of the U.S. Federal Reserve in reducing rates, as U.S. inflation remains high. Recently, Canada became the first G7 nation to cut rates in the current cycle, following similar actions by Sweden and Switzerland.
• On 08/06/2024, In May, the U.S. economy added 272,000 nonfarm payroll jobs, significantly surpassing the expected 190,000 and countering fears of a labor market slowdown, according to the Labor Department’s Bureau of Labor Statistics. This growth, up from 165,000 in April, suggests the Federal Reserve may have less impetus to lower interest rates. However, the unemployment rate rose to 4% for the first time since January 2022, despite expectations it would remain at April’s 3.9%. The labor force participation rate decreased to 62.5%, with household employment dropping by 408,000. Liz Ann Sonders from Charles Schwab noted that while the report seemed strong, underlying numbers, such as the decline in household employment, indicate potential weaknesses. A broader unemployment measure, including discouraged and part-time workers for economic reasons, held steady at 7.4%. Additionally, full-time jobs fell by 625,000, while part-time positions rose by 286,000. Job gains were primarily in health care (68,000), government (43,000), and leisure and hospitality (42,000), which together accounted for over half of the new positions.
• Keith Gill, the stock trader famed for the GameStop short squeeze in 2021, is on track to becoming a billionaire as GME shares surge. Known online as “Roaring Kitty” and “DeepFuckingValue,” Gill disclosed on June 2 that he resumed trading GameStop stock with $180 million. He revealed a $115.7 million position in GameStop shares and $65.7 million in call options on Reddit, triggering a market response that saw GameStop shares rise by 19% within 20 minutes on Robinhood’s overnight markets, contributing to a 38.8% increase in 2024. Analysts at The Kobeissi Letter predict Gill is “set to be a billionaire” as GameStop’s stock price soared to $67.50 per share in after-hours trading. They estimate that if the stock opens at these levels, Gill’s holdings could be valued around $1 billion. The stock’s value increased 110% from June 6, adding $9.5 billion in market capitalization within 12 hours, elevating GameStop’s valuation to $20 billion and positioning it among the 400-largest public companies in the U.S.
• China’s central bank halted its gold purchases in May after an 18-month spree that contributed to gold reaching a record high. The People’s Bank of China (PBOC) announced that its bullion holdings remained unchanged at the end of May, causing gold spot prices to drop by 1.5%. Since November 2022, the PBOC had been significantly increasing its gold reserves amid global geopolitical tensions, driving the metal’s price to above $2,450 an ounce in May. Ole Hansen, head of commodity strategy at Saxo Bank, believes China may not be finished buying gold but is currently pausing due to the high prices. Despite this pause, China’s actions in the past year have reflected a strategy to diversify reserves and mitigate currency depreciation risks. The World Gold Council reported record first-quarter purchases by public institutions, with China leading as the largest buyer. By May, the PBOC’s gold holdings had risen to 72.80 million troy ounces from 62.64 million troy ounces before the buying spree.
• On 11/06/2024, The U.K. unemployment rate unexpectedly increased to 4.4% between February and April, its highest level since September 2021, amid a heated general election campaign focusing on economic issues. This rise, from 4.3% in the previous quarter, contradicts economists’ forecasts that it would remain steady. Simultaneously, strong wage growth continued, with wages excluding bonuses growing by 6% annually. This persistent wage inflation, coupled with high consumer spending power, suggests the Bank of England may delay cutting interest rates, with November seen as the most likely timing for a potential rate reduction. Market projections show minimal chances of a rate cut in June, a 36% probability in August, and nearly 60% in September.
• On 12/06/2024, Apple’s stock surged 7% to a record high of $207.15 per share after the company unveiled its new AI features at its annual developer conference, surpassing its previous peak from December 14. The conference introduced updates such as an enhanced Siri, integration with OpenAI’s ChatGPT, and new writing tools and emojis, likely necessitating iPhone upgrades. Investors welcomed these advancements, with Morgan Stanley analysts noting that these features position Apple as a leader in consumer digital agents and could accelerate iPhone replacement cycles. Bank of America analysts echoed this optimism, maintaining a buy rating due to the anticipated multiyear upgrade cycle and potential for growth in services and gross margins.
• Pacific Investment Management Co. (Pimco) anticipates more failures among regional banks in the US due to their heavy exposure to troubled commercial real estate (CRE) loans. John Murray, head of Pimco’s global private CRE team, noted that the real wave of distress is just beginning for lenders involved with malls, offices, and similar properties. The uncertainty over when the Federal Reserve might cut interest rates has compounded the challenges for the CRE sector, where high borrowing costs have decreased valuations and triggered defaults. Larger banks have been selling higher quality assets first to avoid deeper losses, but Murray expects banks to soon begin selling more troubled loans as stressed loans grow due to maturities. Pimco has been buying CRE loans offloaded by major US banks over the past 18 months. The turmoil has particularly impacted regional banks, which increased their CRE exposure that has significantly devalued, and investor concerns persist following the collapse of several smaller banks last year.
• On 13/06/2024, The U.S. consumer price index (CPI) showed no increase in May, indicating a slight easing of inflation, as reported by the Labor Department on Wednesday. The CPI, which measures a broad range of goods and services costs across the U.S. economy, remained flat for the month but rose 3.3% over the past year. This was in line with the previous month’s annual increase but fell short of economists’ expectations of a 0.1% monthly rise and a 3.4% annual rate. Excluding food and energy, core CPI grew by 0.2% monthly and 3.4% annually, also below predictions. Following this report, stock market futures rose, and Treasury yields dropped, with the Dow Jones Industrial Average climbing about 250 points and the 10-year Treasury yield decreasing to 4.27%. Despite the overall lower inflation figures, shelter costs increased by 0.4% for the month and 5.4% annually, reflecting ongoing challenges in the Federal Reserve’s efforts to manage inflation. Energy prices dropped by 2%, and food prices rose by just 0.1%, while gas prices specifically fell by 3.6%. Motor vehicle insurance saw a minor monthly decline but remained significantly higher year-over-year.
• On 14/06/2024, Tesla shareholders ratified CEO Elon Musk’s massive 2018 pay plan during the annual meeting in Austin, Texas, despite a Delaware judge’s earlier order to rescind the package for being improperly granted. The ratification doesn’t overturn the court’s ruling but serves as a public relations win for Musk, potentially aiding his efforts to retain his performance options. The controversial compensation package, once valued at $56 billion, was criticized in January by a Delaware court for the board’s lack of independence and failure to provide full disclosure to shareholders. Following the vote, Tesla shares rose 2.9% to $182.47, although the stock remains down 27% for the year amid declining sales and increased competition in China. Additionally, shareholders approved Musk’s proposal to move Tesla’s incorporation from Delaware to Texas.
• On 18/06/2024, The Reserve Bank of Australia (RBA) has expressed concern that high government spending could fuel demand while the economy remains robust, with Governor Michele Bullock indicating a “slow grind” to return to the inflation target. At a press conference, Treasurer Jim Chalmers dismissed the RBA’s warning, emphasizing that interest rate outlooks are influenced by multiple factors and maintaining independence in their respective roles. The RBA decided to keep the cash rate at 4.35 percent but remains wary of inflation risks following stronger-than-expected inflation and household spending figures. Bullock highlighted that the upcoming June quarter consumer price index, due on July 31, will be crucial in assessing whether the inflation rise to 3.6 percent in April truly reflects underlying pressures. She noted that while earlier rate increases were straightforward, the current situation is more complex.
• On 19/06/2024, U.K. inflation fell to the Bank of England’s target of 2.0% in May, according to the Office for National Statistics. This decrease from 2.3% in April met economists’ expectations. Sterling saw a slight rise, trading at $1.2721 shortly after the release. Services inflation, closely monitored by the BOE, was at 5.7% in May, down from 5.9% in April. Core inflation, excluding energy, food, alcohol, and tobacco, also fell to 3.5% from 3.9%. The main contributors to the decline were falling food prices, despite car fuel costs exerting upward pressure. Additionally, unseasonably bad weather resulted in the slowest increase in grocery sales in two years, with a 1.0% rise in the four weeks to June 9, marking the sixteenth consecutive monthly decline in food inflation.
• On 25/06/2024, Nvidia, after briefly becoming the world’s most valuable company, has experienced a 13% decline from its peak, with Monday marking its second steepest drop of the year at 6.7%, bringing its stock price to $118.11. This decline has also affected other tech and chip companies tied to the AI boom, such as Super Micro Computer (down 8.7%), Dell (down 5.2%), Arm (down 5.8%), Qualcomm (down 5.5%), and Broadcom (down 3.7%). Despite the recent drop, Nvidia’s value has nearly tripled over the past year, reflecting significant investor optimism regarding its role in AI development. The sell-off might represent investors locking in gains after a strong run, although some analysts, like Hightower’s Stephanie Link, suggest that Nvidia shares have been overly favored and that other tech stocks might now offer better risk/reward profiles. Nvidia remains optimistic about the demand for its AI GPUs and is expected to drive further growth with its upcoming next-generation AI chips, Blackwell, anticipated to be released later this year.
• On 26/06/2024, Australia’s monthly inflation rate surged to 4% in May 2024, the highest this year, suggesting that the Reserve Bank of Australia (RBA) may not cut interest rates soon and could consider further hikes. This increase follows a 3.6% rate in April and exceeds the 3.8% expected by economists. The rise was driven by a 9.3% year-over-year increase in automotive fuel prices, despite a 5.1% monthly decline, and a 6.5% increase in electricity prices from a year ago, which would have been 14.5% higher without federal and state rebates. Food prices presented a mixed picture, with an overall 3.3% year-over-year rise but a notable 4.4% increase in fruit and vegetable prices. Housing costs jumped 5.2% from May 2023, with rents soaring 7.4% due to low vacancy rates in many cities. The RBA is particularly concerned about the acceleration of the trimmed mean measure of inflation, which increased to 4.4% from 4.1% in April. The RBA has indicated it may raise its key interest rate for the 14th time if it loses confidence that inflation can return to its 2%-3% target by the end of next year. Following the inflation report, the Australian dollar rose, and stocks initially dropped before paring losses.
• On 27/06/2024, The Japanese yen hit its weakest level against the U.S. dollar in nearly 38 years on Wednesday, reaching 160.82, surpassing the previous record of 160.03 from April 29, 1986. This sharp depreciation has raised expectations of potential intervention by Japanese authorities in the currency markets. Historically, when the yen last breached the 160 mark, it subsequently strengthened significantly during the trading session, leading analysts to speculate about possible intervention. Japan’s Ministry of Finance later confirmed such an intervention in May, having spent approximately 9.7885 trillion yen ($62.25 billion) on currency stabilization measures between April 26 and May 29, marking the first such action since October 2022.
• On 28/06/2024, The Japanese yen weakened to new 38-year lows on Friday, surpassing the 161 mark against the U.S. dollar for the first time since 1986, reaching a high of 161.27, as per LSEG data. This follows the currency’s steady depreciation since the Bank of Japan ended its negative interest rate policy and yield curve control policy in March. The yen had already crossed the 150 mark against the dollar and reached 160 in late April before Japan’s finance ministry intervened, spending 9.7885 trillion yen ($62.25 billion) from April 26 to May 29. Despite this intervention, Dong Chen, chief Asia strategist at Pictet, expects the yen to remain weak due to the significant interest rate differential between the U.S. and Japan, with the U.S. federal funds rate at 5.25%-5.5% and Japan’s rate at 0%-0.1%. He believes that unless this differential narrows significantly, the yen’s weakness will persist.
• On 29/06/2024, President Joe Biden’s recent debate performance, which was criticized for being unfocused and inarticulate, has caused significant anxiety among Democrats. Some commentators and fundraisers are even calling for a new nominee to run against former President Donald Trump. However, replacing Biden this close to Election Day would be politically risky and difficult. Currently, the only feasible way for Biden to be replaced is if he voluntarily ends his campaign, but his aides and top Democratic officials indicate he has no intention of doing so. If Biden did step down, there is no clear alternative candidate identified. Nevertheless, the panic among donors and party officials has led to discussions about persuading congressional leaders, particularly Senate Majority Leader Chuck Schumer, to urge Biden to drop out.