Daily Comment (May 14, 2024)

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Good morning! Equity futures are off to a slow start due to a hotter-than-expected PPI report. In sports news, the Boston Celtics were able to snatch a 3-1 lead in the series against the Cleveland Cavaliers. Today’s Comment will explore why white-collar workers are facing a tough job market, explain the rise in demand for used electric vehicles despite weakening overall demand, and discuss China’s potential economic stimulus measures ahead of its July Politburo meeting.

Labor Losing Leverage: While the labor market remains tight for the broader population, there are signs that certain sectors are struggling.

  • The selectivity of the labor market may complicate the Federal Reserve’s ability to balance its price stability and maximum employment mandate. Since many of these roles are relatively high-paying, laid-off workers may rely on savings before turning to government assistance. This could delay their appearance in unemployment figures and potentially raise the chance that the Fed may keep rates higher for longer than the economy can tolerate. While a hard landing is not our base case for this year, we do believe the risks are elevated given the signs of sticky inflation.

Renewable Comeback: While electric vehicle (EV) sales are hurting the bottom lines of major automakers, the used car market is seeing an uptick in the sales of EVs.

  • The improved affordability of EVs will likely serve the US’s needs both geopolitically and domestically. The US government is promoting a switch away from combustion vehicles as a way to wean households off their reliance on energy sources increasingly dominated by countries with hostile governments. At the same time, the drop in used car prices has been a major contributor to the decline in overall inflation. As the world fights for market share in the green energy space, we can expect volatility in the electric vehicle market.

China Boom: Beijing may use fiscal and monetary policy to help boost the economy in time for the Third Plenum.

  • The lack of lending by banks may explain why the government is taking a more proactive role in stimulating the economy. It likely needs to take the lead until banks improve their balance sheets. The increases in bond issuance may be a prelude to a much larger announcement at the Third Plenum. While the exact nature of the announcement remains unclear, there is a strong possibility that the government could use the funds to help stabilize the real estate market. If true, this may help give the economy an extra jolt but could also weigh on the yuan.

In Other News: The US and China are set to meet to discuss AI as the two sides look to prevent a possible miscalculation. The return of Roaring Kitty has led to a surge in GameStop shares, a sign that retail investors are still willing to take on risk.

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