March 20: Fed Day, Revisiting Rate Cut Timing Expectations
Powell and crew to deliver some sober talk to the market
The market’s attention will be focused primarily on the outcome of today’s Fed meeting, which will generate a fresh policy statement and an updated set of economic projections at 2 PM ET. While no change in policy is expected today, investors will be reading Fed tea leaves for clues as to when the central bank may begin a long-expected rate cutting cycle. Complicating that timing, recent metrics, and other data, including copper, lumber, oil and gas prices, reveal inflation pressures persist.
Our expectation is that will lead to a sobering tone from the Fed and Fed Chair Powell with the Fed reiterating it will not relent until its job to bring inflation toward its 2% target is achieved. However, with 9 months left in 2024 and four policy meetings in 2H 2024, we do not expect the Fed’s updated economic projections to show fewer rate cuts than the three it telegraphed back in December. Those forecasts, however, are likely to show upward revisions for GDP and inflation figures at least for this year. That will signal the Fed keeping its options open when it comes to rate cuts, but we also expect Powell to maintain that the central bank does indeed remain “data dependent.”
Our thinking is that means that, at least for now, rate cut expectations will need to slide into 3Q 2024. Even though the upward GDP revisions that we expect to see support the current market narrative, we could see some market turbulence as expectations for 2H 2024 are re-evaluated.
European Central Bank chief Christine Lagarde reiterated that June is the month in which policymakers will consider bringing interest rates lower. “By June we will have a new set of projections that will confirm whether the inflation path we foresaw in our March forecast remains valid.”
The Biden administration is softening fuel economy standards, which will slow the transition to electric vehicles from gas-powered ones. Separately, the Environmental Protection Agency will announce revised requirements for 2027-2032 vehicle emissions, easing them through 2030 and then ramping up through 2032. The EPA's original proposal would've led to battery EVs accounting for a whopping 60% by 2030 and 67% by 2032 of total vehicle sales, compared to the current ~8%. The revised rules will likely let automakers build 50% EVs by 2030.
Model Musings
Artificial Intelligence
“The government of Saudi Arabia plans to create a fund of about $40 billion to invest in artificial intelligence, according to three people briefed on the plans — the latest sign of the gold rush toward a technology that has already begun reshaping how people live and work.” Read more here
“Microsoft has hired Mustafa Suleyman, a well-known leader and entrepreneur in artificial intelligence, to lead the software giant’s efforts on consumer AI products. Suleyman helped lead Google’s DeepMind, a pioneering artificial intelligence lab that the company acquired in 2014. He left Google and co-founded AI startup Inflection AI, a startup that was last valued at $4 billion and raised funding from investors including Microsoft and Nvidia.” Read more here
“Epic is betting that generative artificial intelligence will be the future of healthcare. The EHR vendor is developing over 60 applications that use the technology, including a billing chatbot and tools to create denial and appeal letters and emergency department discharges. The company's dominance in the hospital industry could give it an advantage in the generative AI market, as health systems might be more likely to invest in a company they've already spent tens — to hundreds — of millions on for their EHRs, Forbes reported March 18.” Read more here
CHIPs Act
“The US will award Intel Corp. $8.5 billion in grants and as much as $11 billion in loans to help fund an expansion of its semiconductor factories, the Commerce Department announced Wednesday, marking the largest award from a program designed to reinvigorate the domestic chip industry. The package will support more than $100 billion in US investments from Intel, including efforts to produce cutting-edge semiconductors at large-scale plants in Arizona and Ohio, the department said on Wednesday. The money also will help pay for equipment research and development and advanced packaging projects at smaller facilities in Oregon and New Mexico.” Read more here
Consumer Inflation Fighters
“Split-payment or installment plans such as buy now, pay later (BNPL) enable consumers to spread the costs of purchases over multiple installments. Consumers appear to prefer these options. PYMNTS Intelligence data revealed that in the 12 months before being surveyed, about 3 in 5 shoppers opted for installment plans when shopping. This growing popularity has captured the attention of merchants. Seventy-eight percent of them told PYMNTS Intelligence that they plan to enhance their use of installment plans, while 39% of acquirers, the entities that enable merchants to offer these plans, said they plan to do the same.” Read more here
“Second-hand shopping is gaining traction in several countries around the world. Data from the Statista Consumer Insights survey reveals that in the United States, now as many as 60 percent of respondents say they have made at least one second-hand purchase in the past year, up from 49 percent in 2019. A similar trend can be seen in the other countries polled in the survey, with France seeing the biggest leap (+17 p.p.)” Read more here
The Strategies Behind Our Thematic Models
Aging of the Population - Capturing the demographic wave of the aging population and the changing demands it brings with it.
Artificial Intelligence – Software, chips, and related companies that facilitate the collection and analysis of large data sets and autonomous generation of solutions given non-machine language prompts.
CHIPs Act – Capturing the reshoring of the US semiconductor industry and the $52.7 billion poised to be spent on semiconductor manufacturing.
Cloud Computing – Companies that provide hardware and services that enhance the cloud computing experience for users, such as co-location, security, and edge computing.
Consumer Inflation Fighters - Companies poised to benefit as consumers stretch the disposable spending dollars they do have.
Core Holdings – Companies that reflect economic activity and are large enough to not get pushed around by day-to-day market trends. Low-beta, large-cap names able to better withstand economic turmoil.
Digital Infrastructure & Connectivity -The buildout and upgrading of our Networks, Data Storage Facilities, and Equipment.
Data Privacy & Digital Identity - Companies providing the tools and services that verify authorized users and safeguard personal data privacy.
EPS Diplomats - Profitable large capitalization companies proven to produce above-average EPS growth and provide investors with the benefit of multiple expansion.
EV Transition - Capturing the transition to EVs and related infrastructure from combustion engine vehicles.
Guilty Pleasure – Companies that produce/provide food and drink products that consumers tend to enjoy regardless of the economic environment and potential long-term health hazards associated with excessive consumption.
Homebuilding & Materials – Ranging from homebuilders to key building product companies that serve the housing market, this model looks to capture the rising demand for housing, one that should benefit as the Fed returns monetary policy to more normalized levels.
Market Hedge Model – This basket of daily reset swap-based broad market inverse ETFs protects in the face of market pullbacks, overbought market technicals, and other drivers of market volatility.
Luxury Buying Boom - Tapping into aspirational buying and affluent buyers amid rising global wealth.
Market Hedge Model – This basket of daily reset swap-based broad market inverse ETFs protects in the face of market pullbacks, overbought market technicals, and other drivers of market volatility.
Nuclear Energy & Uranium – Companies that either build and maintain nuclear power plants or are involved in the production of uranium.
Precision Ag & Agri Science – Companies that look to address shrinking arable land by helping maximize crop yields utilizing technology, science, or both.
Rebuilding America - Turning the focused spending on rebuilding US infrastructure into revenue and profits.
Safety & Security – Targeted exposure to companies that provide goods and services primarily to the Defense and security sectors of the economy.
Space Economy – Companies that focus on the launch and operation of satellite networks.
The strategies behind our Dividend Income Models:
Monthly Dividend Model – Pretty much what the name says – this model invests in companies that pay monthly dividends to shareholders.
ETF Dividend Model – High-yielding ETFs that provide a range of exposures from domestic equities, international equities, emerging market equities, MLPS, and REITs.
ETF Enhanced Dividend Model – A group of high-yielding ETFs that utilize options to enhance yield through collecting option income.
Don’t be a stranger
Thanks for reading and if you have a suggestion for an article or book we should read, or a stream we should catch, email us at info@tematicaresearch.com. The same email works if you want to know more about our thematic and targeted exposure models listed below.