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Rate Cut Hopes Grow

The markets finished slightly higher this week as investors eagerly await the next round of earnings announcements.  Despite, or perhaps because of, what appears to be a slowing economy, investors are once again hopeful that interest rate cuts are just around the corner.  We will learn a lot over the next month, as companies deliver guidance that will give us an indication to what extent they believe the trending economic slowdown will affect their bottom lines.  Depending on the level of said expectations, we may be in for a slightly bumpy road ahead.  The silver lining is that as forecasts worsen, expectations for an interest rate cut increase.  To some degree, these events could negate each other, and provide for a period of consolidation before once more allowing the markets to head higher.

The big news this week is that the economy is in fact slowing.  For some time now we’ve watched as inflation has trended lower.  However, to the chagrin of the Federal Reserve, the economic data has continued to stay stubbornly strong.  The tide seems to have turned in June as we learned that both the ISM Manufacturing PMI and ISM Services PMI have slipped below 50, which indicates contraction.  Additionally, while the jobs report remains modestly strong, it is showing signs of slipping as fewer jobs were created in June than expected.  And lastly, the unemployment rate moved up to 4.1%, having bottomed out last year at 3.5%.  With the increase in unemployment and a slowing economy, it is reasonable to believe a rate cut is on the table.  Whether that happens this summer or after the presidential election is anyone’s guess.

In company news, I discovered that Hain Celestial, the tea you find at virtually every supermarket, is innovating in ways that I wouldn’t have imagined.  The company announced it will generate electricity from fruit at its main UK plant.  It has something to do with an anaerobic digestion plant that processes fruit waste to create biogas.  If that all sounds strange, I admit I was surprised too.  In other news regarding electricity, Constellation Energy is in talks with Pennsylvania lawmakers to help fund a possible restart of part of the Three Mile Island nuclear power facility.  As a child living in the Northeast at the time, I remember the fear this disaster triggered.  While they’re not attempting to restart the reactor that melted down in 1979, they do believe there is a case to be made for expanding nuclear energy throughout the country and they’re starting with Three Mile Island.

While I don’t often talk about banks and banking, they play a vital role in our lives.  For a long time, banks were boring, providing a place to save money or pay our bills with checks via snail mail.  The landscape has changed over the past couple decades.  Online banking has certainly put a dent in what we may consider the old-fashioned brick-and-mortar neighborhood institution.  So, it came as a surprise when I read this week that Marianne Lake, JPMorgan Chase’s CEO of Consumer & Community Banking, bluntly stated that customers should be prepared to pay for their bank accounts.  When the Fed Funds rate hovered near zero percent some years back, the idea of a negative interest rate emerged.  The idea of having to pay your bank for them to use your savings seemed ludicrous at the time.  And yet, here we are.  Recent legislation to limit what banks can charge in overdraft fees will reduce banks' ancillary revenue.  To make up for the shortfall, JPMorgan Chase is floating a trial balloon to see how customers might react.  Regardless, it appears that due to the Consumer Financial Protection Bureau (CFPB) or the profit motive of banks themselves, banking could become substantially more expensive in the future.

In closing, I want to share an article I read this week that had me thinking.  In a report, Morgan Stanly put forward the idea that “Humanoids” could fix labor shortages and demographic trends by 2050.  According to the report, humanoid robots could take up more than 60 million jobs by 2050.  Morgan Stanley analyst Katy Huberty said, “Labor shortages and demographic trends are raising commercial relevance and creating paths for adoption across a broad range of industries.”  They identified a total addressable market of $3 trillion.  In addition, the cumulative number of U.S. jobs with “humanoid optionality” could reach 8.4 million by 2040, before jumping to 63 million by 2050.  As for what that means for workers of the human variety, the wage impact could be $1 billion by 2030, $357 billion by 2040, and $2.95 trillion by 2050.  While this could be good news and suggests a completely different societal structure in the future, as far as work is concerned, it does pose more questions than answers. Now you know. 

Bruce J. Mason, MBA