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MAY 3, 2023

FED’S DECISION DAY FOR INTEREST RATE HIKE HAS ARRIVED

The Federal Reserve is expected to raise interest rates by a quarter percentage point today – 10th increase since March 2022, bringing the rate to between 5% – 5.25%. The Fed’s following steps will be closely watched as it considers whether to indicate the end of its rate hikes or leave room for further tightening if inflation persists. Despite recent hints of weakening, inflation has remained persistently high, remaining above the 2% target rate. Indicators such as the “trimmed mean” highlight inflation of around 4.7% in March, up from 3.9% in March last year. Christopher Waller, a Fed official, expressed doubts about raising interest rates further, noting concerns about the economy’s ability to adapt. The Fed is also calling for a rise in the U.S. debt ceiling.

TURMOIL IN BANKING INDUSTRY PUTS U.S. REGIONAL LENDERS AT RISK

Shares of mid-sized U.S. banks have dropped significantly, with lenders such as PacWest Bancorp and Western Alliance Bank extending losses from earlier this week. This comes after the bank sector was put in turmoil again after First Republic Bank, the third major regional bank to fail within two months, was seized and its assets were sold to JPMorgan Chase & Co on Monday. Moreover, KBW Regional Banking Index closed at its lowest level since December 2020 on Tuesday. Many financial institutions are struggling with large unrealized losses while deposits are declining due to digital withdrawals, raising concerns about the possibility of further bank failures.

FINANCIAL EXPERTS FAVOR BONDS OVER STOCKS FOR ECONOMIC RESILIENCE

JPMorgan Chase & Co., UBS Group AG, and Morgan Stanley are among the investment banks and financial institutions which recommend debt securities like bonds as a safer investment option rather than stocks. They believe that bonds will withstand a potential economic slowdown better than equities as stocks may be at risk if the Fed does not deliver a smooth landing. Furthermore, bonds are becoming more profitable, with the gap between the yields of high-grade dollar bonds and dividend yields of companies increasing by almost 90 basis points over the past year. Lisa Shalett, the chief investment officer at Morgan Stanley Wealth Management, warns that stock investors may need to prepare for the possibility of multiple contractions at the same time as earnings begin to decline.

FORD BEATS EXPECTATIONS BUT STRUGGLES WITH EV LOSSES

Ford reported strong first quarter revenue and earnings that beat Wall Street expectations. Revenue was $41.5 billion, up 20% from last year, and earnings per share were $0.63, higher than the expected $0.41. However, Ford’s EV segment saw losses of over $700 million, which led to a net loss of $3.1 billion during the first quarter of the year. Ford also announced a re-opening of orders for its all-electric Mustang Mach-E at lower prices. Despite the positive results, Ford’s Model E EV business unit still faced deep losses. Ford’s shares dropped 1%, but remains competitive with other top automobile companies.

AMD REPORTS STRONG FIRST QUARTER BUT DROPS IN STOCK

AMD exceeded their revenue and earnings expectations for the first quarter but still experienced a 6% drop in stock after releasing their current period guidance, missing analysts’ estimates. The company reported $5.35 billion in revenue, beating the expected $5.3 billion for the quarter. However, AMD’s net income declined to a loss of $139 million from a net profit of $786 million the previous year. The biggest decline took place in AMD’s client group, consisting of PC processors, which reported $739 million in sales compared to $2.1 billion in the same period last year. CEO, Lisa Su, also noted that they are expecting growth in the second half of the year as PC and server markets strengthen.

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