Market Morning Roundup: PCE Inflation, Volcker Rule, North Korea Talks and now EU Trade War

Stock Market Roundup

Fed’s Favorite Inflation Index, PCE, Due Today

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It’s the end of the month and you know what that means. That’s right traders and investors – everyone’s favorite bureau, the renowned Bureau of Economic Analysis, will release its Personal Consumption Expenditures (PCE) index numbers before market open. Nobody is expecting much surprises and news coverage leading up of the release has been scant, what with all that’s happening with Italy, North Korea, and China. This means if there are surprises to the upside on these inflation stats, they will likely have an outsized effect on treasuries (NYSEARCA:TLT) and/or gold (NYSEARCA:GLD).

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Personal income is expected to rise by 0.3% month over month for April, with personal consumption forecast to grow 0.4%. The year on year advance in the PCE last month was 2.0% exactly, right on the nose of the Federal Reserve’s arbitrary inflation target it thinks is comfortable for some reason. However, the Fed is unlikely to change its monetary policy course until and unless the PCE year over year inflation rate goes above 3%. That could take a while. Or maybe not. We’ll find out more in a few hours.

What to do: If there is an upside surprise, it may be time to buy some inflation hedges.

Volcker Rule Going Out the Window So Banks Can Trade Hedge Funds and Private Equity

In what may end up amounting to an “I told you so” moment depending on how this works out, Cantor Fitzgerald CEO Howard Lutnick was quoted on Fox Business as saying that if the so-called Volcker Rule is repealed, “Banks financial number are going to get better…you’re going to see lovely results for the second half of this year from all financials.” (NYSEARCA:XLF) The Volcker Rule was instituted as part of the Dodd Frank bill of 2010 and it forbids banks from trading hedge funds and private equity. The Federal Reserve will be voting on jettisoning the restriction today, and the vote will probably pass.

What to do: Enabling banks to trade with less restrictions may give them a temporary boost, but it won’t help if fundamentals begin to break down at global flashpoints. Financials remain extremely risky considering the teetering European Union.

Airbnb Ready for 2019 IPO

The Uber of the hotel industry, Airbnb, says it will be ready for an initial public offering by 2019, according to CEO Brian Chesky. On caveat, it will be ready, but he doesn’t know if it will actually happen. The company is valued privately at around $31 billion, it is profitable, and it is already encountering Uber-like resistance from major cities including New York and San Francisco, which have banned the real-estate-sharing platform from listing short term rentals. They say it’s because it makes housing unaffordable for some reason (not for the people who want short term rentals), but the hotel industry may be involved behind the scenes here. Airbnb made the smart move of lobbying the government to use its services, arguing that it would save taxpayers money over hotel stays. Redirect those taxpayer dollars and create the Airbnb-industrial complex, as the saying may soon go.

North Korean Summit Preparations Heat Up

Ever since President Donald Trump cancelled his cancellation of a summit with North Korean leader Kim Jong Un, ties between the US and North Korea have been thawing. Secretary of State Mike Pompeo met last night with North Korean official Kim Yong Chol for about 90 minutes, but nobody knows what they talked about. Probably not how the kids are, they’ve grown, that’s what happens when you feed them. More likely about nuclear weapons and such. Judging by the tone coming out of officials connected to the meeting, things don’t look too bright in terms of an agreement or compromise. One State Department official was quoted by Reuters as saying that Trump can “make a fly or no-fly decision anytime he wants” regarding the anticipate Singapore summit. “We will ramp up the pressure on the m and we’ll be ready for the day that hopefully they are ready,” he said if the US does not get the concessions it wants from Pyongyang.

What to do: Considering the ultra hawkishness of the people involved in the preparations for this summit in Singapore, things do not look too bright despite ongoing contacts. Mike Pompeo and National Security Advisor John Bolton have notoriously harsh tongues and are not likely to give North Korea much wiggle room regarding anything. The chances of this summit breaking down again and roiling markets are still substantial.

Trade War Talks With EU On Friday

While considering talking with North Korea, the United States is also negotiating a possible two-front trade war against what’s left of the European Union, and China. Trump Administration trade gurus Wilbur Ross and Robert Lighthizer met with EU officials yesterday to discuss possible exemptions from tariffs that threaten $7.4 billion in European exports. The EU has threatened swift retaliation if exemptions from tariffs scheduled to take effect Friday (tomorrow) are not granted. Meanwhile, China says it also reserves the right to retaliate against US investments if the Trump Administration insists on placing tariffs on the People’s Republic.

What to do: A two-front trade war won’t be good for any economy involved in it. Watch out for retaliatory tariffs. It would provide a boost to US aluminum companies however. Watch Alcoa (NYSE:AA) which has doubled since Trump was elected on the anticipation of aluminum tariffs.


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