Later this afternoon, the Federal Reserve will release the results of its 2022 bank stress tests, which were established under Dodd-Frank regulations following the global financial crisis. All 34 U.S. banks with over $100B in assets will be checked against a series of doomsday scenarios to ensure their balance sheets can withstand a hypothetical downturn. The results – which will particularly focus on stress in commercial real estate and corporate debt markets – come amid growing fears of a looming recession, meaning an economic spiral may not be all that hypothetical.
Snapshot: In the first session of a two-day testimony on Capitol Hill, Fed Chair Jerome Powell emphasized that the central bank plans to keep raising interest rates until it sees clear proof that inflation is slowing, even if that means causing a recession. “It’s not our intended outcome at all, but it’s certainly a possibility,” he told the Senate Banking Committee. “We are not trying to provoke and do not think we will need to provoke a recession, but we do think it’s absolutely essential” to bring down price pressures. Stocks edged lower following the testimony, while U.S. equity index futures wavered between gains and losses overnight.
“The events of the last few months around the world have made it more difficult for us to achieve what we want,” Powell continued. “We’ve never said it was going to be easy or straightforward.” The messaging is a notable departure from his stance on March 2, when Powell stated it is “more likely than not that we can achieve what we call a soft landing.” The Fed has already raised rates three times since then, and most recently upped the federal-funds benchmark by 75 basis points in the largest hike since 1994.
More on stress tests: The annual health checks dictate the required size of each bank’s “capital buffer,” which refers to the extra cushion of capital that’s set aside on top of the regulatory minimum needed to support daily business. The checks also determine how much lenders can return to shareholders in the form of share buybacks and dividends (which could only be announced from June 27). This year’s tests might be harder because the actual economic baseline is healthier, while spikes in unemployment or a drop in GDP would be felt more acutely. However, all of the banks are still expected to pass, but could be told to set aside slightly more capital than last year. (10 comments)
Sounding the alarm
A troublesome energy crisis is escalating across the globe, as a myriad of factors continues to impact flows, output, supply and production. The latest warning bell went off this morning as Germany announced it would move to the so-called “alert stage” of its emergency gas plan, seeing a high risk of long-term gas supply shortages. The crunch has been exacerbated by sanctions and Russia’s Vladimir Putin turning off the taps, and comes amid a similar situation in the U.S. that saw President Biden release a four-point plan to lower prices at the pump (including a federal gas tax holiday).
Quote: “This will affect industrial production and become a major burden for many consumers. It’s an external shock,” German economy minister Robert Habeck declared. “We will defend ourselves against this, but it will be a rocky road that we as a country now have to walk. Even if you don’t really feel it yet, we are in a gas crisis.”
Germany announced the first phase of its emergency gas plan on March 30, when the Kremlin’s demands for payment in rubles prompted Germany to prepare for a potential cutoff in supply. Local suppliers were subsequently invited to advise the government as part of a crisis team and Habeck called on consumers to reduce their consumption. While the second phase doesn’t call for state intervention measures, it could trigger a change in the law that passes along price increases to industry and households.
Outlook: Over the past week, Moscow has slashed capacity to Germany via Nord Stream 1 by 60%, leading to outsized moves for gas contracts as the country attempts to refill its storage before wintertime. If Germany ups its gas plan to the third and last “emergency” level, the government would assume control over the entire nation’s distribution network. Germany has already reopened several coal-fired power stations to shore up supply, which could dent European support for climate efforts or push Ukraine into an unfavorable settlement with Russia. (3 comments)
How will the economy work in the metaverse? Meta (META) CEO Mark Zuckerberg addressed some of those questions during an interview with Mad Money‘s Jim Cramer, emphasizing a big role for creators and their digital goods. That compares to previous strategies executed by Zuckerberg, in which he tried to build out connected services like Facebook, Instagram, Messenger and WhatsApp that were only followed by company-orchestrated monetization.
Quote: “We hope to basically get to around a billion people in the metaverse doing hundreds of dollars of commerce, each buying digital goods, digital content, different things to express themselves, so whether that’s clothing for their avatar or different digital goods for their virtual home or things to decorate their virtual conference room, utilities to be able to be more productive in virtual and augmented reality and across the metaverse overall,” he said on the call.
Last Friday, Meta launched a digital clothing store for the metaverse, where users can scoop up designer apparel for their virtual avatars. While initial brand partners included Balenciaga, Prada and Thom Browne, the store also envelops the creator side of the platform, with a mission to be open marketplace where developers can make and sell outfits. Earlier this month, Meta (previously called Facebook) even changed its long-held ticker symbol of “FB” to “META,” as it sheds its identity as a pure social media provider.
Timeline: “Quest 2 has been a hit,” continued Zuckerberg. “I’ve been really happy with how that’s gone. It has exceeded my expectations. But I still think it’s going to take a while for it to get to the scale of several hundreds of millions or even billions of people in the metaverse, just because things take some time to get there. So that’s the north star. I think we will get there. But, you know, the other services that we run are at a somewhat larger scale already today.” (15 comments)
The U.S. continues to be on edge before some upcoming Supreme Court rulings, especially following the leak of a draft decision in May to overturn Roe v. Wade. No one really knows the exact date that a ruling will come down, but today and tomorrow are marked as “opinion issuance days” on the high court’s calendar. The secrecy offers some benefits to justices by making protests outside the Supreme Court more difficult to organize, while rulings are less likely to impact the stock market if the case is financial in nature.
Snapshot: More than a dozen opinions will need to be issued before the court departs for its traditional summer break, which usually happens by late June or early July. The court also has a history of announcing its most important rulings of the term last, which might center on Roe or other controversial decisions surrounding religious freedoms, gun rights and asylum-seeking migrants. PR experts are divided on how businesses should respond to the latest happenings and the CEOs that listen to them are taking differing approaches as well.
Many companies have so far been quiet on the draft ruling, like Apple (AAPL), Amazon (AMZN), Citi (C), Mastercard (MA), Microsoft (MSFT), Netflix (NFLX) and Starbucks (SBUX), which have instead chose to offer their U.S.-based employees travel reimbursements for out-of-state abortions. The messaging is intended to show support without touching the hot topic, though a handful of firms are urging them to publicly take a stand. “Given what is at stake, business leaders need to make their voices heard and act to protect the health and well-being of our employees. That means protecting reproductive rights,” Levi Strauss & Co. (LEVI) declared, while similar statements were made at Match Group (MTCH) and Yelp (YELP).
Go deeper: There aren’t too many companies that have publicly supported the draft opinion and many PR experts caution that it is best when Corporate America steers clear of divisive political issues (at least as much as they can). Most businesses have taken this approach, especially with the “Don’t Say Gay” tussle between Disney (DIS) and Florida’s legislature remaining fresh in the minds of corporations nationwide. “There is no upside in speaking out alone on this,” added Jeffrey Sonnenfeld, professor and senior associate dean of the Yale School of Management. “Nobody wants to have 40% of the country mad at them.” (24 comments)
In Asia, Japan +0.1%. Hong Kong +1.3%. China +1.6%. India +0.9%.
In Europe, at midday, London flat. Paris -0.1%. Frankfurt -0.9%.
Futures at 6:20, Dow +0.1%. S&P +0.3%. Nasdaq +0.7%. Crude -1% to $105.16. Gold -0.4% to $1831.50. Bitcoin +1.6% to $20,747.
Ten-year Treasury Yield -3 bps to 3.12%
Today’s Economic Calendar
8:30 Initial Jobless Claims
8:30 Current Account
9:45 PMI Composite Flash
10:00 Powell testifies before House Financial Services Committee
10:30 EIA Natural Gas Inventory
11:00 EIA Petroleum Inventories
11:00 Kansas City Fed Mfg Survey
4:30 PM Fed Balance Sheet
Crypto bailouts: BlockFi secures credit line from Sam-Bankman Fried’s FTX.
Factories in Berlin and Austin losing billions of dollars – Elon Musk.