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Catalyst watch for the week of June 11. Seeking Alpha Managing News Editor Kim Khan breaks down his favorite week, Fed week. He tells us how the markets will react once CPI is released (00:37). Seeking Alpha Associate News Editor Kevin Curran gives investors a preview of what to expect when Oracle Corporation (NYSE:ORCL) reports earnings. (05:04) Oracle leads to another hot topic, AI. Will there be a hotter buzz word in 2023 and which companies will really reap the benefits?
Julie Morgan: Kim, as usual, even though we haven’t been here for what, a couple of weeks or maybe three weeks. We’re gonna start with you. What’s major going on next week?
Kim Khan: Well, next week’s gonna be my favorite week. It’s fed week and it’s gonna be one of the most exciting ones we’ve had in recent memory. If you find exciting as being a little unsure about what’s gonna happen we’ve had all these great hikes baked in coming up to now five to five and a quarter percent where the Fed funds rate is at, but now it might be time for a pause and that’s what the market is betting on.
Today, the last I looked, the futures were pricing in it’s 70% chance that the Fed would keep rates steady. That doesn’t mean they’re done hiking. In fact, they are pricing in another hike maybe in July.
But fed officials were pretty kind adamant, especially Philly Fed President Patrick Harker recently saying that, look, we can skip a meeting. That doesn’t mean we’re completely done and that certainly doesn’t mean we’re gonna cut, but we can, we can take a break here.
And that’s what the market is kind of taking its tune from. But there has been a little upheaval this week with Global Central Bank action, which has been interesting. In fact, you know, you’ve had surprise rate hikes from a couple of central banks.
First you had the Reserve Bank of Australia, which hiked rates unexpectedly, and then even more so I think you talk about an o bleep moment. Well, bond traders had an O Canada moment when the Bank of Canada just came out and raised by a quarter point, and that was really expected considering that Canada was one of the first, the signal that it was pretty much done back in January.
It was kind of saying that it was leveling off. So now we’re where there’s a worry that just the global pressures are coming and the Fed might feel some impetus to kind of surprise the market as well now that that’s already been done.
JM: Okay, So you talked about what’s likely, but what could possibly change their minds?
KK: The day before the Fed decision? You’ve got the C P I for May, and that could definitely change their minds. It’s a huge number for them along with the jobs number and the jobs number was pretty mixed. We had strong payroll growth, but also a high rise in unemployment, some mixed messages there.
But a hot CPI could really give the Fed a reason to say, okay, that’s it. We still gotta move with our pace of getting inflation down to 2%. We’ve gotta hike again. The expectations, let’s looked, were for a 0.2% rise in the headline number, 0.4% rise in core inflation for the month.
And you know, if something comes in how hotter than that, especially on the core level and you see maybe the core annual rate rise, then you could certainly see some big vociferous debate in the Fed and possibly a quarter point hike.
JM: Okay, so if things don’t go as planned, I’m just thinking about this and I say, well, so if CPI does not come in where they would like to see it, what could happen to the market?
KK: If they go ahead and they say, well, we’re gonna raise it again.
Well, the market will probably adjust on the C P I number, and that’s what you’re gonna see. It’s gonna be if it comes in on an expected deal, you’ll see an immediate jump in treasury yields.
You’ll see immediately drop in stock index’s futures. And so that the market will probably be braced for that. Then though they’ll be kind of concerned and kind of positioning for whether, you know, j Powell will pull the rug out from under them because if it, if it does come in hot and, and we see strong inflation, I think it’s gonna be up to Powell to make that call and others will follow.
He’s gonna have to make that executive chairman decision and say, okay, look, we thought we could pause. I’m not gonna let no one number change our mind. Or a kid say, look, we got flatfooted. I’m not gonna stop hiking. Let’s go for another one.
JM: So Kevin, tell me what’s happening in terms of earnings, even though I know it’s not busy, but there’s something out there.
Kevin Curran: Yeah, as you said, it’s not it’s not the peak of the season, certainly. But that’s not to say that there isn’t anything out there. There is Oracle early in the week. We have Lennar is a major name in home builders during the middle of the week.
A couple of other ones that are a bit more niche with the likes of Aurora Cannabis and Ammo Inc. For example later in the week, Adobe and Kroger are likely to roll out the carpet for some of the interest in both cloud and of course consumer staples with Kroger being of key interest with the merger still sort of in limbo.
JM: So let’s talk a little bit more about Oracle.
KC: Oracle, I think in, in my view, as kind of a forgotten player in the AI space they are looking to dive in there and they have a key partnership with Nvidia talking about their D G X cloud technology, of course. And when you’re looking at Nvidia as of late, if you looked at their earnings report, they spiked, you know, 25% putting ’em in a trillion dollar club for a brief moment there.
And you know, it’s probably the hottest name in the market in 2023 thus far. And if you hear an earnings call coming up and you have a partnership with a company like that, I’m sure we’ll hear a lot about what strides they’re making in AI.
And of course, also I’ll be looking for some commentary on the progression of their integration of Cerner, which is you know, a healthcare focused cloud business that they’ve integrated into their overall business since November, 2022 when that acquisition closed.
So they have their hands in a lot of pots, and it’ll be interesting to hear the commentary and the type of story they can tell. And obviously there’s areas that, you know, everybody in the market is talking about now. It’s hard to, you know, make any conversation about any stock without at least incorporating how AI will affect it in some manner.
JM: That’s funny that you say that because I was just thinking every time we talk about AI, I wonder if there will be a hotter buzzword later on in the year, like, can it get hotter than AI right now?
KC: It certainly doesn’t seem that way. I mean, it’s you know, I shudder to think that we’ll be replaced by AI that you know, I need to keep up some kind of cadence to make sure that our listeners understand that I’m not computer programmed and generated.
Maybe I would be more eloquent if I was, but no, I, think that it just kind of, it’s something that seems to be moving so quickly and people seem to be likening it to the way that the internet, you know, impacts absolutely every business at this point.
It seems like now we’re trying to get a grip on how exactly AI is gonna impact every business in the future. Now that the progress on that will remain to be seen.
And I think that there are some arguments that maybe we’re overestimating it and how quickly it’s moving, but certainly something that as you said is a fear and optimistic. And it has it’s double-edged sword, let’s say in terms of the conversations that I’m having, as of late.
KK: Goldman Sachs had some interesting comments on AI just this past week from its hedge fund expert. He was talking about the companies that are gonna benefit and, you know, you’ve seen like a AI being kind of rising tide that’s lifting all boats at the moment, but the actual investment that’s necessary to really make some progress in AI, Goldman was saying is, is pretty high.
It’s a huge barrier to entry. So these names that we’ve talked about, Microsoft, Nvidia you know, Apple you know, those, those big players, they’re gonna be the ones that really see kind of immediate benefits and immediate progress.
And those are the stocks that maybe they’ve been the ones that have been carrying the rally all year and may still do. Goldman strategy, equity strategy team also rejected over 20 years the impact that AI would have on S&P earnings and performance.
And they say that, you know, it alone would boost over 20 years S&P earnings by a full percentage point and S&P performance by nine percentage points. That’s saying nothing else happens and suddenly for some reason the stock market stay flat for 20 years, we’d still be higher up in the two decades from now just cuz of AI.
KC: It does seem like just can’t be winners everywhere though as well. You know, we talk about it lifting all boats in the sense of Microsoft, Nvidia, Google, et cetera, getting boosts from this.
But we saw with the mishaps that some of these companies have had that if one company really sets themselves apart, they’ll boost as we saw with Nvidia. But if you have the sort of barred mishaps with providing data that’s non-existent, then the stock can tank. So you know, maybe not lifting all boats, but providing some bifurcation between winners and losers in this pretty hotly contested space.
KK:Well, Wells Fargo came out and said the unthinkable in its initiation of coverage on Google when it gave it an equal weight and said a guy could actually lose the crown in search if it doesn’t come up with the AI necessary for people.
You know, the, like Microsoft is investing heavily in AI search. If they get there first, then Google could be in trouble and suddenly we’re not Googling anything. We’re, I guess, I don’t know if we’re AI being stuff or whatever it’s gonna be called, but it’ll be different.
JM: So let’s switch gears just a bit and talk about travel. We are recording this on Thursday, June 8th, and if you haven’t heard there’s a cloud in the northeast, but why, where is that cloud of smoke coming from?
KC: Yeah, so, you know, we talk about red hot travel red hot in a different circumstance in this regard. We’re seeing a lot of wildfires across Quebec actually in Canada. And that cloud of smoke from the fires is emanating across much of the United States.
Actually, you know, there’s un there’s hazardous according to the EPA conditions across upstate New York Ontario and Canada as well as some parts of central Pennsylvania, but then the most unhealthy air of any major city in the world is New York City, which is on a rung lower in terms of air quality, but that really low air quality actually extends all the way down past Washington dc.
So it’s a pretty significant area that it’s covering. And in terms of the travel angle, we’ve seen multiple ground delays across Philadelphia, major air airports such as Newark J F K and LaGuardia in New York.
And even a ground stop in LaGuardia specifically. So it’ll be interesting to see how long this plays out and what type of impact this has because a lot of airlines are heavily reliant upon the northeast region being a major hub of travel for airlines like JetBlue, for example, that, you know, now has another headache on top of its fallout from the Spirit airline steel falling through as well as the Northeast Alliance under regulatory scrutiny. And when we talk about the summer season being the most important, this couldn’t come at a worse time for major airlines.
JM: This is a topic that was covered today in our Wall Street Breakfast newsletter. If you haven’t checked it out, I’m gonna leave a link. And what’s interesting about it is it gives you a list of climate related ETFs, Kim.
KK: Yeah, I was just gonna say that we should note that travel demand is still really high and it’s still pent up from two years of lockdown. So people wanna travel, they wanna fly you know, price increases. Haven’t dented that demand yet.
We’ll see if anything else kind of dense that demand cancellations can be a big problem. If you know you have to totally rearrange your vacation or cancel a vacation, it becomes a huge hassle, then it becomes a big economic cost. I certainly, like we’re talking about this now because of the New York effect.
I mean, if something happens in New York, then the entire country hears about it and it’s kind of been that way since the, you know, the golden age of early television in the fifties. It’s just how it is with, with the media set up and how, you know, things get covered.
But, you know, I’ve still seen a lot of people in the west coast saying, Hey, okay, but we deal with these conditions, you know, every summer, so what’s so new about this? But if it starts to be, you know, we see these kind of extreme weather phenomenon really coming into play and people canceling trips that could be something that could maybe tilt, you know, demand into the other direction and have people kind of maybe moving back sometimes the stay. But I think we’re really far away from that.
KC: Yeah, and also in terms of the New York effect, i I, I wrote yesterday, just to put it into context about some of the cancellations of flights yesterday, the flight cancellations across Europe were far more significant based upon worker strikes that have been ongoing for quite some time. For example, a nationwide strike across a number of unions in France recently over their pension reforms.
Air traffic controllers have been on strike that have been a thorn in the side of the likes of Ryan Air for many months now. And you’re just not hearing as much about it because we’re focused on the New York area. So, you know, there’s prob probably more problems on the transatlantic schedules in terms of French airspace than across the a metro Atlantic area. But it is getting more coverage, as Kim said, just based upon how the media apparatus is structured. Yeah.
KK:And have to say, I mean, things in New York are, are getting, you know, they are pretty weird if anybody’s seen the pictures and I’m, I’m sure all our listeners have, it’s really just a, a weird thing to see a totally obscured New York skyline by this cloud. It kind of brought a lot of things to a, to a halt which is interesting. I know we have another thing event we had this this week was Apple unveiling. It’s $3,500 VR headset. So if New Yorkers can’t go outside, maybe they’ll start saving up for that headset.
JM: So Kim, this is something I haven’t had to ask you in a couple of weeks, but what about the survey for next week?
KK: We’re gonna be looking at something about the Fed definitely, and it’s gonna be likely just to be a straight up question on whether the Fed is gonna hike or not, since that’s still up in the air.
JM:Sounds good. That’s something that we look forward to in the Wall Street Breakfast Newsletter, our daily one page news summary. Well, that’s all we have for today. Thanks so much for listening and we’ll see you next time.
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