WEEKLY | INFLATION: PERMANENT OR TRANSITORY?

Last week, three main sources were the main drivers of the stock market's up and down movement, allowing May to start on the upside with the main US stock indexes recovering part of the losses registered in April.

Among the factors were:

The Federal Reserve (FED) maintained its monetary instance rate at 5.5% ruling out, for now, further monetary policy rate hikes.
Employment data for the month of April was out of line with market expectations, with the unemployment rate at 3.9%, job creation at 175 thousand and wage inflation at 3.9%, marking the lowest growth since mid-June 2021.
The giant Apple announced the repurchase of its own shares for US$110 billion, generating a weekly rebound of +8.3% in its share price, thus driving the stock market higher.

At the same time, over the weekend we were watching for comments from the legendary Warren Buffett who made sure to leave his two lieutenants, Greg Abel and Ajit Jain, in charge of the company's operations with almost US$189 billion in liquidity after the conglomerate reduced its equity exposure during the first quarter of the year, thus being able to follow in Apple's footsteps with a massive share buyback program if necessary.

This week the focus will be on several verbal interventions to be managed by Fed representatives with the central banks of Australia, Brazil and the UK deciding on the evolution of their monetary rates. In Brazil, monetary authorities are expected to lower their rate by an additional 50 basis points to 10.25% (from its current 10.75%) with annualized inflation below 4%. On the corporate front companies including Airbnb, Disney, Dropbox, Lyft, Tapestry Toyota, Rivian, Robinhood and Uber among many others will be reporting their first quarter results. According to Factset, sales and profits of the companies that make up the S&P 500 have been growing 4.1% and 5%, respectively, during the first quarter of the year compared to the same quarter of the previous year, exceeding market expectations.

On the geopolitical front, Chinese President Xi Jinping is on an official visit to France, where he will not only be having dinner with French President Emmanuel Macron, but will also be meeting with the top political leadership of the Euro Zone in order to avoid an escalation in tariffs. For its part, the Israeli government, ignoring the regional negotiations that the US government wanted to carry out the previous week, announced that the civilian population of Rafah in the Gaza Strip should take refuge in the face of an imminent attack in that city against Hamas.

Focusing on the macroeconomic front, part of the question is whether the increase in inflation during the first months of the year is transitory or permanent. In this context, Fed Chairman Jerome Powell was emphatic in stating on May 1, after having maintained the instance rate at 5.5%, that for now the level of rates is restrictive and it is unlikely that they will have to raise them for the remainder of the year.

Powell argued the following:

I think the evidence shows pretty clearly that [monetary] policy is tight and is putting pressure on demand, and there are a few points I would point to to back that up. You can start with the labor market, where demand is still strong, especially on the demand side of the labor market, but it has declined from its extremely high level of a couple of years ago. So, I think it's unlikely that the next move in the policy rate will be an increase. I would say it's unlikely. Our policy approach really focuses on what I just mentioned, which is how long to keep policy tight. If you ask what it would take, I think we would have to see persuasive evidence that our policy stance is not tight enough to bring inflation sustainably up to 2 percent over time. So, obviously, our decisions on our policy rate will depend on the incoming data, how the outlook evolves and the balance of risks, as always. And we will look at the totality of the data.
So I think, and we think, policy is well positioned to address different trajectories that the economy could follow. And we have said that we don't think it would be appropriate to reverse our tight policy stance until we have gained greater confidence that inflation is coming down sustainably toward 2 percent. For example, if we were to have a trajectory where inflation turns out to be more persistent than expected, and where the labor market remains strong, but inflation remains sideways and we don't gain greater confidence, well, that would be a case where it might be appropriate to postpone rate cuts.

These comments were also accompanied by a misalignment in the price of oil, which fell to US$78 a barrel as measured by WTI, along with a less robust labor market with the unemployment rate climbing back to 3.9% and lower wage inflationary pressures. This allowed the 10-year sovereign rate to ease to 4.52% (-15 basis points). For now, in this scenario, the Fed is taking a position that it has degrees of freedom to differentiate whether the inflationary pickup is transitory or permanent.

On the corporate front, we had a news week starting with very good quarterly results generated by Amazon, in this edition led by the company's advertising segment. Apple, with lower quarterly growth, opted to announce a massive US$110 billion share buyback program. Meanwhile in the mining world Anglo rejected the US$39 billion offer managed by BHP while in the film industry Paramount received a US$26 billion counter-offer from Apollo with Sony seeking to take control of the company. Finally, Warren Buffett, over the weekend, following the recent death of his partner, Charlie Munger, made sure over and over again in the lengthy Q&A session to point out that the culture of the company will allow for his disciplined continuity if for some reason he were to become incapacitated. What was evident at his annual meeting in Omaha Nebraska is that Buffett's memory at 93 years of age is as clear as ever.

In conclusion, for now the FED considers that the inflationary rebound is transitory and that monetary policy is restrictive and may give it degrees of freedom of action in the remainder of the year, something that was well received by market agents, especially with some inflationary pressures easing in recent days.

THIS WEEK

Monday (May 06)

Quarterly Reports

Vertex Pharmaceuticals Incorporated
Itau Unibanco Banco Holding SA
Palantir Technologies Inc.
Williams Companies, Inc. (The)
Realty Income Corporation
Simon Property Group, Inc.

Economic Reports

Speech by Richmond Fed President Tom Barkin
Speech by New York Fed President John Williams

Tuesday (May 07)

Quarterly Reports

Walt Disney Company (The)
BP p.l.c.
UBS AG
Arista Networks, Inc.
Ferrari N.V.

Economic Reports

Red Book Annual Change Report
Annual Used Car Prices Change Report
Monthly Used Car Prices Change Report

Wednesday (May 08)

Quarterly Reports

Uber Technologies, Inc.
Arm Holdings plc
Anheuser-Busch Inbev SA
Airbnb, Inc.
Shopify Inc.

Economic Reports

Speech by Board of Governors Ranking Member Philip Jefferson
Speech by Fed Governor Lisa Cook
Speech by Boston Fed President Susan Collins

Thursday (May 09)

Quarterly Reports

Petroleo Brasileiro S.A.- Petrobras
Takeda Pharmaceutical Company Limited
Honda Motor Company, Ltd.
Roblox Corporation
Brookfield Corporation

Friday (May 10)

Quarterly Reports

Enbridge Inc
Biohaven Ltd.
Algonquin Power & Utilities Corp.
CRH PLC
Crescent Point Energy Corporation

Economic Reports

Preliminary Consumer Sentiment Report, Michigan
Remarks by Fed Governor Michelle Bowman

Now you have more information about your investments. See you next week with more news.

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