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Daily Market Report | May 23, 2022

US FINANCIAL MARKET

Stocks Start the Week Higher After Nearing Bear Market – Wall Street Journal, 5/23/2022

  • U.S. stocks rose in morning trading, as the S&P 500 pushed away from bear-market territory after flirting with such levels in a volatile trading session Friday.
  • The broad-market benchmark jumped 1.2% Monday. At one point Friday, the S&P 500 slid so far it was on track to close at least 20% below its January peak—what would have been considered a bear market—before regaining ground.
  • The Dow Jones Industrial Average rose 1.5% on Monday, while the tech-focused Nasdaq Composite Index was up about 0.4%.
  • Ten of the S&P 500’s 11 sectors were in the green, led by financials.
  • In individual stocks, shares of VMware jumped 19% after The Wall Street Journal reported that Broadcom is in advanced talks to buy the technology company. Broadcom shares fell 4%.
  • Investors will also be looking to earnings reports from retail stocks this week, seeking clues about how inflation and the lingering effects of the Covid-19 pandemic are affecting consumers.
  • Macy’s, Dollar General and Costco are among the companies set to report.
  • In bond markets, the yield on the benchmark 10-year Treasury note ticked up to 2.828% from 2.785% Friday. Yields and prices move inversely.
  • U.S. crude prices fell 0.4% to $109.83 a barrel.
  • Gas prices at the pump remained in record territory over the weekend, averaging about $4.59 a gallon nationwide.
  • Overseas, the pan-continental Stoxx Europe 600 rose 0.8%.
  • The European Central Bank is likely to increase its key interest rate to zero or above by September, President Christine Lagarde said in a blog post Monday, drawing a line under an eight-year experiment with negative interest rates amid record-high inflation and mounting concerns about the weakness of the euro currency.
  • In Asia, major indexes closed with mixed performance.
  • Japan’s Nikkei 225 added 1%, while South Korea’s Kospi edged up 0.3%.
  • China’s Shanghai Composite was flat, and Hong Kong’s Hang Seng declined 1.2%.

Broadcom in Advanced Talks to Buy VMware – Wall Street Journal, 5/23/2022

  • Broadcom is in advanced talks to buy VMware, according to people familiar with the matter, setting the stage for what would be one of the year’s biggest deals.
  • The technology companies are discussing a cash-and-stock deal that could come soon, assuming the talks don’t fall apart, the people said. VMware has a market value of $40 billion, while Broadcom’s is around $222 billion.
  • The deal discussions, which picked up pace in recent days, come roughly six months after computing pioneer Dell Technologies spun off its 81% equity stake in VMware.
  • VMware has a strong position in the market for “hybrid” cloud, where large companies mix public cloud services like those of Amazon.com and Microsoft with their own private networks.

JPMorgan raises 2022 interest income outlook ahead of investor conference – Reuters, 5/23/2022

  • JPMorgan Chase lifted its forecast for interest income and affirmed its profitability target as it opened an investor conference on Monday, where executives are expected to face questions on the bank’s expenses and management of its capital.
  • The country’s largest lender said it now expects net interest income (NII), excluding markets, of $56 billion in 2022.
  • It had earlier forecast NII outside its market business to reach a “couple billion” more than $53 billion in 2022, up from its $50 billion outlook in January.
  • JPMorgan said its 2022 outlook for NII was based on an assumption that the Fed raises short-term rates up to 3% by year-end.
  • It also assumed high single-digit loans growth and a “modest” step up in securities investments.
  • Charge-offs for bad loans are estimated to rise to pre-pandemic levels “over time” but not until after 2022, thanks to strong consumer and business balance sheets, the bank said.
  • The company also affirmed target for a 17% return on tangible capital equity (ROTCE) and said it may be achieved in 2022.
  • ROTCE is a key metric which measures how well a bank uses shareholder money to produce profit.

Apple Looks to Boost Production Outside China – Wall Street Journal, 5/23/2022

  • Apple has told some of its contract manufacturers that it wants to boost production outside China, citing Beijing’s strict anti-Covid policy among other reasons, people involved in the discussions said.
  • India and Vietnam, already sites for a small portion of Apple’s global production, are among the countries getting a closer look from the company as alternatives to China, the people said.
  • More than 90% of Apple products such as iPhones, iPads and MacBook laptops are manufactured in China by outside contractors, according to analysts.
  • Apple’s heavy dependence on the country is a potential risk because of Beijing’s authoritarian Communist government and its clashes with the U.S., analysts have said.
  • Any move by Apple, the largest U.S. company by market capitalization, to emphasize production outside China could influence the thinking of other Western companies that have been considering how to reduce dependence on China for manufacturing or key materials.
  • Such consideration has stepped up this year after Beijing refrained from criticizing Russia for its invasion of Ukraine and carried out lockdowns in some cities to fight Covid-19.

Oil Gains on Tight Fuel Supplies While Recession Fears Grow – Bloomberg, 5/23/2022

  • Oil prices rose slightly on Monday, supported by U.S. fuel demand, tight supply and a lack of progress towards a European ban on Russian oil, as Shanghai prepares to reopen after a two-month coronavirus lockdown that fueled economic growth fears.
  • Oil extended four weeks of gains amid tight fuel supplies and a weaker dollar, though elevated prices are fanning concerns that the world economy may be heading for a recession.
  • West Texas Intermediate futures topped $111 a barrel while gasoline and diesel prices have rallied to records ahead of the start of the US driving season in about a week.
  • The Biden administration is considering tapping a little-used emergency diesel fuel reserve to mitigate the supply crunch amid Russia’s invasion of Ukraine, according to a White House official.

Starbucks to Exit Russia After Pausing Business There in March – Bloomberg, 5/23/2022

  • Starbucks will exit Russia completely, marking the latest corporate withdrawal from the country after its invasion of Ukraine.
  • In March, Starbucks said its licensed partner had agreed to immediately suspend operations at all 130 of its stores in Russia.
  • The more recent decision will mean ending its brand presence in the country, with the company paying nearly 2,000 workers for six months and providing help for job transitions, Starbucks told employees Monday.

US Gets First 70,000 Pounds of Baby Formula to Ease Shortage – Bloomberg, 5/23/2022

  • A planeload of more than 70,000 pounds (32 metric tons) of baby formula arrived in the US, starting an emergency program to alleviate a national shortage that has left some parents scrounging to feed their children.
  • More formula will start arriving in stores “as early as this week,” Brian Deese, President Joe Biden’s top economic adviser in the White House, said on CNN’s “State of the Union.”
  • The plane that landed in Indianapolis on Sunday will address “15% of the overall national volume that we need,” he said.
  • Faced with pressure by Republicans and Democrats to address the crisis, Biden last week ordered the use of government planes to airlift infant formula to the world’s richest country.
  • He also invoked emergency powers under the Defense Production Act to spur domestic manufacturing.

Average age of U.S. cars hits record high due to tight supplies, report says – Reuters, 5/23/2022

  • U.S. consumers are using their existing vehicles for longer as the inventory of new cars and light trucks remains constrained due to supply chain challenges, marking an all-time high for the average age, according to a report from S&P Global Mobility.
  • The average age of light vehicles in operation (VIO) in the United States rose to 12.2 years this year, increasing by nearly two months from the prior year, the report said.
  • The average age of light vehicles in operation in the U.S. is expected to rise through 2022 and 2023, as the pipeline for new vehicle production and sales continues to be weighed down by parts shortages, the report said.
  • Supply chain constraints have led to a decrease in vehicle scrappage, which measures the number of vehicles leaving the vehicle population, and has been a catalyst for the rise in average age over time.

US ECONOMY & POLITICS

Americans Reported Strong Personal Finances Late Last Year, Fed Finds – Wall Street Journal, 5/23/2022

  • Americans reported the highest level of financial well-being last fall than at any point in almost a decade, according to a Federal Reserve survey, bolstering households ahead of growing economic uncertainty.
  • The survey, conducted in October and November of last year and released Monday, is a sign that households entered 2022 in good shape, ahead of the disruptions caused by the Omicron wave of Covid-19 and the highest inflation in four decades.
  • Overall, 78% of adults said they were either doing OK or living comfortably, up from 75% in 2020 and the highest share since the survey began in 2013.
  • Stronger family finances have made it easier for people to afford an unexpected expense.
  • About 68% of adults said they would be able to cover a hypothetical $400 expense using cash or putting the expense on a credit card, up from 50% in 2013.
  • Parents with children in the home saw a significant increase in their financial well-being last year.
  • Three out of four parents in the survey said they were doing at least OK financially, up from 67% in 2020.

Small Businesses Lose Confidence in U.S. Economy – Wall Street Journal, 5/23/2022

  • Small businesses are flashing warning signs on the U.S. economy as inflation, supply-chain snarls, a shortage of workers and rising interest rates darken the outlook for entrepreneurs.
  • Fifty-seven percent of small-business owners expect economic conditions in the U.S. to worsen in the next year, up from 42% in April and equal to the all-time low recorded in April 2020, according to a survey of more than 600 small businesses conducted in May for The Wall Street Journal by Vistage Worldwide Inc., a business-coaching and peer-advisory firm.
  • Despite rising prices, the portion of small businesses that expects revenue to increase in the coming year fell to 61%, down from 79% in May 2020.
  • Twelve percent of businesses surveyed said they expected economic conditions to improve and another 28% said they would stay about the same.

Biden Kicks Off Economic Group Linking U.S., Asia – Wall Street Journal, 5/23/2022

  • President Biden and leaders from a dozen countries in the Indo-Pacific region on Monday endorsed a new economic platform meant to counter China’s influence through cooperation on global issues such as supply chains, clean energy and digital rules.
  • The Indo-Pacific Economic Framework marks the Biden administration’s most ambitious attempt to build economic ties with Asian nations after the U.S. under then-President Donald Trump pulled out of the Trans-Pacific Partnership in 2017.
  • But unlike the TPP, which went into effect in late 2018 without U.S. participation, the new group doesn’t include plans to negotiate lower tariffs or broad steps to clear away barriers to market access.
  • The White House said the nations in the new framework collectively represent about 40% of global gross domestic product.
  • U.S. allies Japan and South Korea joined the group as well as seven nations in the 10-nation Association of Southeast Asian Nations: Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam. In addition, India, Australia and New Zealand joined.

Biden Says U.S. Would Intervene Militarily if China Invaded Taiwan – Wall Street Journal, 5/23/2022

  • President Biden said the U.S. would respond militarily to defend Taiwan if China tries to take it by force, sparking uncertainty over whether the U.S. was moving away from its longstanding policy of strategic ambiguity and prompting a clarification from the White House.
  • Mr. Biden’s comments were met with anger from Beijing and praise from Taipei. They were also part of a pattern: In August and October of last year, the president answered questions on Taiwan by suggesting a break in U.S. policy toward the democratically self-ruled island, only to have aides jump in to say nothing had changed.
  • The president was asked if the U.S. would get involved militarily in response to a Chinese invasion of Taiwan after declining to send American troops to Ukraine to fight Russia’s invasion.
  • “Yes. That’s the commitment we made,” he said.

As Biden Zeroes In on Student-Loan Forgiveness Decision, Voter Anxiety Grows – Wall Street Journal, 5/23/2022

  • President Biden in the coming weeks is expected to decide whether to put forward a student-loan forgiveness plan aimed in part at motivating young voters to cast ballots in November’s elections.
  • At the University of North Carolina, and in neighborhoods across the surrounding Research Triangle area, there are signs that whatever approach he takes could leave swaths of voters dissatisfied.
  • Students and recent graduates with heavy debt loads worry that Mr. Biden’s plan will be too weak, after the president and his advisers signaled they are considering relief that could be far less than the $50,000-per-borrower sought by prominent Democrats.
  • At the same time, voters who tightened their belts to pay off their loans or didn’t go to college say it would be unfair to make taxpayers subsidize school debt for Americans whose education can boost their earning power.
  • Mr. Biden is likely to face political blowback from the kind of voters that Democrats need to turn out in November if they hope to limit midterm election losses that have been predicted by pollsters.
  • A moratorium on student-loan payments that started at the onset of the Covid-19 pandemic is set to expire at the end of August just as the thick of the campaign season gets under way.

EUROPE & WORLD

Lagarde Signals End to ECB’s Negative Interest Rates Experiment – Wall Street Journal, 5/23/2022

  • The European Central Bank is likely to increase its key interest rate, currently negative, to zero by September and could continue raising rates after that, President Christine Lagarde said, signaling the end of the ECB’s eight-year experiment with negative rates amid record-high inflation and concerns about the weakness of the euro currency.
  • The policy shift, outlined in an ECB blog post on Monday, follows robust actions by the Federal Reserve and other major central banks to phase out easy-money policies as inflation heats up around the globe.
  • It is part of a sharp pivot by the eurozone central bank, which had until recently signaled it would increase interest rates only gradually, diverging from the Fed.
  • “With the inflation outlook having shifted notably upward compared with the prepandemic period, it is appropriate for nominal variables to adjust—and that includes interest rates,” Ms. Lagarde wrote.
  • It is the first time that Ms. Lagarde has signaled such an aggressive interest-rate trajectory. She had previously indicated that the ECB might start increasing interest rates in July and that any further increases would be gradual.

Cost-of-Living Crisis is Holding Back UK Economy, BOE Chief Warns – Bloomberg, 5/23/2022

  • Bank of England Governor Andrew Bailey said the cost-of-living crisis is holding back the UK economy and that policy makers will take that into account in gaging how much to raise interest rates.
  • Appearing on a conference panel on Monday, Bailey also pushed back against recent political criticism of the BOE, saying that its response to the pandemic wasn’t responsible for the “painful” rise in inflation the UK is experiencing.
  • The remarks highlight the conflicting forces the BOE is having to balance as it aims both to rein in inflation, which has leaped to a 40-year high, and keep the economy recovering from the pandemic.

Didi Says It Will Proceed With Delisting From NYSE – Wall Street Journal, 5/23/2022

  • Chinese ride-hailing giant Didi Global said it would proceed with its plan to delist from the New York Stock Exchange, after securing approval from its shareholders at a Monday meeting.
  • The move will allow the company to move forward after a long period of disruption during which Beijing tightened its grip on the country’s tech companies and their troves of data. Didi had told shareholders it needed to delist before it can resolve a continuing cybersecurity probe in China.
  • Some 96% of shareholders who cast votes at the meeting favored the delisting proposal, the company said.
  • A May 11 filing with the U.S. Securities and Exchange Commission said that Didi’s founders Will Cheng and Jean Liu had indicated they intended to vote in favor on a one-vote-per-share basis.

Factmonster – TODAY in HISTORY

  • Christopher Columbus died in Spain. (1506)
  • Charles Lindbergh began the first solo nonstop transatlantic flight, departing from Long Island aboard the Spirit of Saint Louis. (1927)
  • Amelia Earhart took off from Newfoundland to become the first woman to fly solo across the Atlantic. (1932)
  • A mob attacked a busload of “freedom riders” in Montgomery, Ala., setting the bus on fire. (1961)
  • In a 6-3 vote, the Supreme Court rejected a Colorado measure banning laws that protect homosexuals from discrimination. (1996)
  • East Timor became the what was then the world’s newest nation. (2002)

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