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Stock Market Rally Isn't Running Out of Fuel. US Economy Still Acing Stress Tests.
President Donald Trump may have to write a sequel to his 1987 book, "Trump: The Art of the Deal." It's hard to make a deal if you kill your opponent. He said that about Iran today again: "They’re all messed up. They have no idea who their leader is... We took out, really, three levels of leaders... So they have a hard time figuring out who the hell can speak for the country." Reports surfaced today that Mohammad Bagher Ghalibaf, the Speaker of the Iranian Parliament and Tehran's lead negotiator, has resigned from the negotiating team. He allegedly did so due to persistent interference from the hardliners in the Islamic Revolutionary Guard Corps. As a result, Brent is back up to $100 a barrel this evening. However, the futures market is still signaling a sharp decline over the next 12 months (chart). That's certainly a possible outcome, but why isn't the price of oil much higher today since the Straight of Hormuz has been effectively shut to navigation since February 28, when the war started? Oil is leaving the Middle East via pipelines and oil truck convoys. Also, Russia is supplying more oil to both China and India. Japan is buying oil from Mexico. Apparently, the US stock market can live with $100 oil for now. Indeed, sentiment has turned more positive as can be seen in the latest readings of our two favorite Bull/Bear Ratios (chart). They aren't high enough to give us pause about the stock market rally that started on March 31. Today was a bad day for software-related stocks (chart). The management of ServiceNow stated that the ongoing conflict in the Middle East has started to delay deal closings in the region. IBM reported slowing growth in its software segment, specifically within Red Hat. Their stock prices fell 18% and 7%, respectively. Microsoft added to the somber mood by offering voluntary buyouts to long-tenured employees today. It's a first for the giant, signaling a massive internal reorganization to pivot away from traditional software toward pure-play AI efforts. Meta also announced it is slashing roughly 8,000 jobs worldwide. Adding to the low morale, Meta recently disclosed a new program that has employees on edge. The company is installing software on work laptops to capture keystrokes, mouse movements, and screenshots, with the goal of training "AI agents" to autonomously perform tasks currently done by humans. Investors are continuing to rotate out of software and into hardware, such as semiconductors and semiconductor equipment (chart). After the close, Intel announced great results, beating estimates. Shares traded as much as 20% higher. Investors are increasingly betting on the long-term consequences of the Technology Revolution and looking past the short-term mess in the Middle East. In recent days, the Defiance Quantum ETF has soared to record highs (chart). Investors are also betting on the ongoing resilience of the US economy, which was confirmed by today's economic data: (1) Jobless claims. Initial unemployment claims for the week ended April 18 ticked up modestly but remain well below their long-run historical average and their 2025 average—hovering near some of the lowest levels of the past year and fully consistent with an economic environment in which layoff activity is historically subdued (chart). The same story holds for continuing claims, which we track as a proxy for the difficulty unemployed workers face in finding new employment. Continuing claims edged up slightly during the week ended April 18 but remain below their 2025 average, and the four-week moving average continues to hover near its lowest level since June 2024. That is an encouraging signal: not only are layoffs low, but those who do lose their jobs are finding new ones more easily. We interpret this as evidence that hiring activity may be starting to improve. (2) Flash PMIs. April's S&P Global Flash PMI data were strong, notwithstanding higher energy prices (chart). The Services PMI Business Activity Index rebounded to its highest level in two months in April, snapping back from a brief dip below the expansion threshold in March. New business inflows accelerated, service sector employment grew faster, and business confidence improved. Even more striking, both the Manufacturing PMI and the Manufacturing Output Index surged to multi-year highs in April. The breadth of the improvement was notable, with new orders, output, and employment all expanding at an accelerating pace. A note of caution is warranted, however. A portion of the manufacturing gains were driven by precautionary inventory building ahead of anticipated supply shortages and price hikes, rather than by an acceleration in underlying demand. Supply chain disruptions tied to the Middle East conflict intensified, with supplier delivery times deteriorating to their worst levels since mid-2022 and a surge in safety-stock purchases that echoes the pandemic-era dynamics of 2021. These pressures fed directly into prices: average selling prices rose at the fastest pace since mid-2022, and input cost inflation hit an eleven-month high.
Read Full AnalysisData Centers Unplugged & RTX During Wartime
Data centers are notorious gluttons for electricity and water, but not punishment. More and more are employing novel ways to address the outrage targeted at them by environmentalists and local communities, Jackie reports. … Also: One innovative company has a sea change in mind for data centers. Panthalassa has developed a combination hydroelectric plant/data center that bobs unanchored in the ocean waves—no land, no grid, no complaints. … And: With bloated backlogs and earnings flying high, RTX is one company benefiting from the war.
Read Full AnalysisWarsh, Rinse, Repeat
We are Fed Watchers. In his Senate Banking Committee hearing yesterday, Kevin Warsh suggested that under his leadership, we might have less to watch. He advocated ending current "forward guidance" practices, which means no more quarterly Summary of Economic Projections, including the Dot Plot (chart). He suggested that a press conference after FOMC meetings should only be held when there is "important news" to deliver, rather than as a mandatory, periodic routine. He implied that the volume of current Fed speaking engagements may be excessive and counterproductive to clear policy signals. Under his leadership, the Talking Fed Heads on the Federal Open Mouth Committee will talk less. Woe with us! What are we going to do for a living? (1) Warsh on inflation. At least Warsh didn't call for abandoning the 2% inflation target in his "regime change" (chart). But he argued for a "stricter approach" to inflation targeting and a "new inflation framework" to replace the current regime. Warsh heavily criticized the "Flexible Average Inflation Targeting" (FAIT) framework adopted under Jerome Powell in 2020. He described it as a "fatal policy error" because it intentionally allowed inflation to run above 2%, which he argued led to the post-pandemic price surge. He advocated for narrowing the Fed's focus back to its "core mandate" of price stability, implying a return to a more rigid interpretation of the target. Instead of changing the inflation target, Warsh wants to move the Fed away from using the PCED inflation rate. He explicitly stated a preference for "trimmed averages" and "median measures." However, they tend to understate inflationary pressures. (2) Warsh on productivity. On a happier note, Warsh agrees with us that technological innovations (especially AI) are boosting productivity, which means the economy can grow faster without inflationary consequences. He argues that if AI creates a "productivity-enhancing wave," it acts as a "structurally disinflationary" force. He suggested that Fed models should be updated to account for the fact that this increased output can allow for lower interest rates without triggering an inflation spike. Actually, all he needs to do is promote unit labor cost (ULC) inflation as the underlying inflation rate in the labor market (chart). Faster productivity growth slows ULC inflation, which is highly correlated with the headline CPI inflation rate. ULC inflation fell to 2.4% y/y in Q4-2025. (3) Warsh on interest rates. While we agree with Warsh that productivity growth is improving, we disagree that this means the Fed should cut the federal funds rate. He believes that productivity growth lowers the neutral interest rate. We think it has increased, especially today, when so much money is pouring into technology capital spending. Stimulating an economy that is already stimulated raises the risks of fueling speculative excesses. During economic booms, interest rates need to be high enough to allocate capital rationally to avoid irrational exuberance. Interestingly, markets are currently pricing in no rate cuts this year, with the first fully priced reduction pushed out to the October 2027 FOMC meeting (chart). Warsh is likely to be confirmed as Fed Chair sometime this year, yet he has had no impact on the markets' rate expectations. (4) Warsh on the FOMC. The federal funds rate is determined by a majority vote among the twelve voting members of the FOMC. Warsh would need to persuade a majority of the committee that lower rates are appropriate, which is a high bar in the current environment. Most Fed officials seem to agree that the policy rate is already close to the so-called neutral rate, meaning it is only modestly restrictive at best. Moreover, the neutral rate itself is likely rising, as structural headwinds to savings and the AI-driven surge in investment exert persistent upward pressure, thereby equalizing savings and investment. Downside risks to the labor market have decreased while upside risks to inflation have increased, driven by the energy price shock emanating from the Middle East conflict. This is not an environment in which a new Fed Chair can easily build a coalition that will advocate for rate cuts. (5) Warsh on the Fed's balance sheet. Warsh made clear he would prefer interest rate adjustments as his primary policy tool over large-scale asset purchases. He raised a distributional concern that is rarely aired in public: that expanding the balance sheet through Treasury purchases disproportionately benefits those with financial assets, helping wealthier households more than ordinary Americans. His long-term objective is to actively shrink the Fed's balance sheet, which he characterized as having become an "unhelpful" and routine policy tool that entangles the Fed in political pressure. Warsh argued that a smaller balance sheet would support lower rates, better inflation outcomes, and stronger growth, while also stressing that the process must be executed slowly, transparently, and in coordination with the Treasury. The Fed's balance sheet exploded during the pandemic and has only partially unwound since, leaving Warsh with an enormous task if he is serious about returning it to a size that no longer distorts financial markets (chart) (6) Warsh on sock puppets. President Donald Trump has made no secret of his desire for lower rates and has joked about suing Warsh if cuts are not delivered. Senator John Kennedy (R-LA) asked bluntly whether Warsh would be the President's "human sock puppet." Warsh vowed to be "an independent actor, if confirmed." Democrats, led by Senator Elizabeth Warren, pressed Warsh repeatedly on whether he had made any private commitments to Trump on rates. He denied it. We are not concerned about Fed independence. Our view mirrors that of Senator Thom Tillis (R-NC), who observed that Warsh "has to be" independent because he must "convince eleven other people" to vote with him. The Fed is a consensus-based institution, and concerns about its independence have, in our view, been overplayed.
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