Trail 142 — To Infinity and Beyond
Markets Update by Aashish Singh
Business Update by Sylvia Lo
Financial markets are fascinating. They are constantly evolving, they follow no predetermined path and much like humans, their behaviour at times is completely irrational. Every day their movements are thoroughly analysed, yet their next steps are a complete mystery. They follow a random walk and therein lies their beauty. Each week I briefly recap a few stories that captured my interest.
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US monetary policy updates are the most important days for traders globally across asset classes. Even with key current idiosyncratic events from post-election volume in India to Japanese Central Bank reduction in bond buying, all traders look to US rate movements to dictate their next moves. This is because every other rate curve is benchmarked against Dollar rates (also known as the risk-free curve) and usually trades at a fixed differential to the Dollar curve. This is also true of the FX markets which takes its cue from the dollar strength/weakness to set intra currency rates. US equity markets are similarly a bellwether for global equities, often setting the risk appetite for the pack. So, this week was a big data week for global markets searching for clues to predict the path for US rates.
We had both the release of US CPI and the FOMC dot plot on Wednesday. US consumer price inflation came in softer than expected (and so did the producer price index the following day) but the hawkish tone from the Fed meeting was much more sobering. The Fed indicated only 1 cut with a small chance of another by year end.
However, this projection for fewer rate cuts and the hawkish comments did little to prevent the S&P 500 recording a new lifetime high above 5,400. The benchmark is up more than 50% since hitting a bottom in October 2022 and showing little signs of slowing down. Tech shares continued their ascent but were also supported by financials, materials, and utilities sectors — groups that benefit from rate cuts if there’s robust economic growth. US treasury yields dipping mirrored this sentiment with markets effectively calling the Fed projections a bluff. Options implied volatility fell, Dollar pervasively strengthened and so did Gold, in a trend which continues to show a demise in cross asset correlations.
Mr. Market is overly optimistic, but you can barely fault him as sitting in cash or taking a cautious approach has been brutally punished through this cycle of rapid rate hikes and subsequent high rates. There is no immediate threat to the economy (corporate and retail credit repricing in mid-2025 is the first real challenge) outside of geopolitical escalations. So, keep the seat belts fastened. We haven’t hit stratosphere yet.
Goldman Sachs Boosts S&P 500 Target
Goldman Sachs Group Inc. strategists have boosted their year-end target for the S&P 500 Index for a third time, reflecting Wall Street’s optimistic outlook for earnings growth and the US economy. The bank’s equity strategists led by David Kostin now see the US stock benchmark index finishing the year at 5,600, up from a 5,200 level they predicted in February. The new target implies a roughly 3% advance in the gauge from its Friday close.
Bond Market Splits from Fed Again
Bond traders loaded back up on interest-rate-cut bets — and even the push back coming out of the Federal Reserve did little to shake their conviction. Policymakers kept rates steady at a more than two-decade high on Wednesday and dialled back their forecasts to pencil in just one quarter-point rate cut by year end, about half of what markets are pricing in.
At his post-meeting press conference, Jerome Powell stuck to the message that the central bank is in no rush to shift gears, waiting for more evidence that its fight against inflation is moving in the right direction. But the morning’s consumer price index report had already delivered what traders were waiting for, setting off a bond-market rally by showing that a key measure of inflation cooled to the slowest pace in more than three years.
‘Vol Killer’
Investors hoping the coming months would bring an explosion of currency volatility on the back of multiple central bank interest rate moves are in for disappointment, according to option traders. There were signs currency markets were getting more turbulent when the Australian dollar, euro and yen rallied around 1% after the US reported weak inflation data on June 12. However, those moves fizzled out after Federal Reserve Chair Jerome Powell’s projection for one rate cut this year proved to be a dampener and JPMorgan’s Global FX Volatility Index fell for a second day Thursday — though election angst in France pushed the gauge higher Friday.
In The World of Business
This week, in response to former CEO Bernard Looney’s scandal, BP has mandated that all employees disclose familial and intimate relationships at work, with top managers required to report past relationships from the last three years.
Airbnb CEO Brian Chesky, has been informally pairing employees to enhance support and collaboration, addressing workplace loneliness and fostering deeper professional bonds.
And, despite its traditionally elite image, American Express is attracting a significant number of Gen Z and millennial customers by offering substantial lifestyle perks and expanding its acceptance among merchants.
A Looney Clean-up
In a bold move to prevent another scandal akin to the one involving former CEO Bernard Looney, BP has mandated that all employees disclose any familial or intimate relationships at work. This directive, issued via an internal email last week forms part of a broader effort by the $100 billion oil giant to enforce stricter workplace ethics and avoid future embarrassments.
The updated code of conduct now strictly prohibits employees from directly or indirectly managing relatives or those with whom they have an intimate relationship. Previously, disclosures were only necessary if a potential conflict of interest was identified. However, starting June 1, BP’s 4,500 top managers must report all intimate relationships from the past three years, a move that could potentially unearth long-forgotten issues. This crackdown on workplace relationships is reflective of a broader trend among employers. Following Looney’s controversial exit — where he was accused of not only failing to disclose relationships but also of promoting women he was involved with — BP’s measures highlight a shift towards more vigilant oversight of employee conduct.
Work Duos
In an intriguing approach to team building, Airbnb CEO Brian Chesky has been informally pairing employees to enhance support and collaboration within the company. Speaking on the ReThinking podcast with Adam Grant, Chesky, who co-founded Airbnb in 2008 and boasts a net worth of $11.8 billion, shared how this practice emerged organically. Initially inspired by the successful pairing of two creative directors, Chesky recognized the potential of duos in various departments to leverage each other’s strengths.
Chesky’s method has implications beyond mere operational efficiency. A study by Perceptyx involving over 2,000 employees revealed that more than 40% reported feeling lonely at work, with significant negative impacts on productivity and engagement. Lonely workers were found to be 4.5 times more likely to struggle with their output and resort to unhealthy coping mechanisms. By fostering work duos, Chesky inadvertently addresses this pervasive issue of workplace loneliness, suggesting that shared journeys and mutual support can significantly improve employee well-being and productivity.
Gen Z’s Amex Love Affair
There’s always been something elitist about whipping out an American Express card. Often accompanied by a hefty annual fee and travel perks that resonated with the well-off, Amex has traditionally catered to an older, affluent consumer profile. However, this is rapidly changing as Gen Zers and millennials are now clamouring for that shiny gold plastic. In 2023, these younger generations accounted for 75% of new consumer platinum and gold accounts, according to Howard Grosfield, president of U.S. consumer services at American Express.
Despite facing high inflation, student loans, and housing costs, millennials and Gen Zers are willing to shell out for a card with substantial lifestyle perks. Grosfield notes that these perks, along with Amex’s strong brand affiliation and acceptance at more merchants, appeal to younger, high-spending customers who value unique experiences and special access. While Amex continues to attract young customers with high credit scores and incomes, the company hasn’t lost sight of its premium clientele. The average income of their millennial and Gen Z customers is about 70% higher than the industry average. This shift suggests a long runway for growth from these younger customers, who are increasingly looking for ways to enhance their lifestyle while appearing affluent.
Until next week.
