Markets are adjusting to stubborn inflation. Election noise could spoil the calm

By Nicole Goodkind • Thursday, June 27

Good morning! In today's newsletter: Bond investors are worried about the upcoming election. Plus, new details of the Boeing door plug fiasco emerge.

Just in: Walgreens is closing a 'significant' number of stores.

ICYMI: Whistleblower warned Boeing of flaws in 787 planes that could have 'devastating consequences.'

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MARKET FLASH

Markets are adjusting to stubborn inflation. Election noise could spoil the calm

(Jim Lo Scalzo/EPA-EFE/Shutterstock)

It's been smooth sailing for stocks in 2024. The S&P 500 has gained nearly 15% and has been on a steady upward trend for the past two months.

Treasuries have been more volatile, thrown around by the swings in inflation data, hints about future policy decisions from Federal Reserve officials and higher-for-longer interest rates. But following a spike in yields in April and May, they've calmed a little and should end the first half nearly even.

The relatively benign picture for investors could be about to change, however. The Fed is preparing markets for the possibility that there could be no rate cuts this year. Add to that the noise surrounding the US election, and it could be a rougher second half.

Fed foibles: Treasury yields, which go up as prices fall, have moved higher this week as investors reacted to comments from Fed officials downplaying interest rate cut expectations.

On Tuesday, Fed governor Michelle Bowman said that she's expecting no rate cuts this year. San Francisco Fed President Mary Daly said Monday the Fed must be agile and "if inflation falls more slowly than expected, the policy rate must stay higher for longer."

Meanwhile, Chicago Fed President Austan Goolsbee was also particularly hawkish in his views, saying Monday that he would need to see "more months" of weaker inflation data to even begin to consider cutting rates.

Recent data is also spooking investors. Central Banks in Canada and the eurozone have both cut interest rates, but inflation rose in both of those regions last month. Australia, meanwhile, saw its inflation rate rise to 4% this week, stoking fears that the Reserve Bank of Australia could soon move to raise rates again.

Debt, deficits and debates: The unknowns of the current election cycle have also thrown investors for a loop — especially since neither President Joe Biden nor former President Donald Trump has indicated they plan to rein in the yawning budget deficit.

"With rates back on the upswing due to international price pressure concerns, an important consideration will be whether government debt, deficits and issuance will begin to matter again," said José Torres, senior economist at Interactive Brokers.

As debt goes up, investors often require a higher payout to purchase long-term Treasuries. That could also impact markets. The last 10% correction in stocks occurred as the 10-year Treasury yield touched 5% in October, Torres noted.

Earlier this week, 16 Nobel Prize-winning economists warned in an open letter that a second Trump administration wouldn't just fail to fix inflation — it would make matters worse.

The letter, organized by famed economist Joseph Stiglitz, argued there are valid reasons to worry the Trump agenda will "reignite" inflation.

In particular, the economists point to Trump's "fiscally irresponsible budgets" and nonpartisan research from the likes of the Peterson Institute, Oxford Economics and Allianz that finds the Trump agenda — if successfully enacted — would increase inflation.

What it means: For American consumers, a rising 10-year Treasury yield means more economic pain: expensive car loans, higher credit card rates and even more expensive student debt.

It also means that the cost of mortgages could increase. When 10-year Treasury yields go up, so do mortgage rates; when they go down, mortgage rates tend to follow.

What comes next: Investors are awaiting key economic data this week. The Fed's preferred inflation measure, the Personal Consumption Expenditures (PCE) price index, is out on Friday. That will provide investors with more information about economic forecasts and potential interest rate cuts. The US presidential debate is being hosted by CNN Thursday evening.

VOICES

The housing market is 'stuck' until at least 2026, Bank of America warns

"This will take many years to work itself out. There isn't a magic fix. The message for first-time homebuyers is one of patience and frustration."

MICHAEL GAPEN, HEAD OF US ECONOMICS, BANK OF AMERICA

Read more from CNN Business

NEWS FLASH

Boeing blames missing paperwork for Alaska Air incident, prompting NTSB rebuke

(NTSB/Handout/Getty Images)

The missing paperwork on the 737 Max that lost a door plug on an Alaska Airlines flight in January made it difficult to find out who made the near tragic mistake. The paperwork may have also caused the problem in the first place, Boeing disclosed this week.

It was already well known that no documentation was found to show who worked on the door plug. What was disclosed this week at a briefing for journalists at Boeing's 737 Max factory in Renton, Washington, is that lack of paperwork is why the four bolts needed to hold the door plug in place were never installed before the plane left the factory in October. The workers who needed to reinstall the bolts never had the work order telling them the work needed to be done.

Without the bolts, the door plug incident was pretty much inevitable. Luckily, it wasn't fatal.

It's a sign of the problems with the quality of work along the Boeing assembly lines. Those problems have become the focus of multiple federal investigations and whistleblower revelations, and the cause of delays in jet deliveries that are causing headaches for airlines and passengers around the globe.

But Boeing may have landed itself in even more trouble with regulators for divulging the details at this stage. The National Transportation Safety Board (NTSB) reprimanded Boeing Thursday for releasing "non-public investigative information" to the media. It said in a statement that the company had "blatantly violated" the agency's rules.

During the Tuesday briefing, Boeing said that the particular problem with the Alaska Air door plug occurred because two different groups of employees at the plant were charged with doing the work, with one removing and the other reinstalling the door plug as the plane was passing along the assembly line.

Read more here.

UP NEXT

Nike reports earnings after market close.

Plus, the US Commerce Department reports new orders of durable goods in May and releases its final estimate of first-quarter gross domestic product at 8:30 a.m. ET.

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FINAL WORD

NBC to use AI version of announcer Al Michaels' voice for Olympics recaps

NBC is bringing a version of famed sportscaster Al Michaels back to the Olympics this summer with an unlikely twist: His voice will be powered by artificial intelligence.

NBC announced on Wednesday it will use AI software to recreate Michaels' voice to deliver daily recaps of the Summer Games for subscribers of its Peacock streaming platform, a milestone for the use of AI by a major media company.

The use of an AI voice for the Olympics comes as the technology has grown by leaps and bounds, particularly in its ability to create images, sound and text. That, in turn, has raised questions in creative industries, such as journalism, about how artificial intelligence can — or even should — be used.

A new tool, called "Your Daily Olympic Recap on Peacock," will enable 10-minute highlights packages, which can include events updates, athlete back stories and other related content personalized by subscriber preferences.

The company said the highlights could be packaged in about 7 million different ways, pulled from 5,000 hours of live coverage in Paris, effectively making AI (the artificial intelligence, not the man) a significantly more efficient way to deliver personalized recaps.

"When I was approached about this, I was skeptical but obviously curious," Michaels said in a press release. "Then I saw a demonstration detailing what they had in mind. I said, 'I'm in.'"

A NBC spokesperson told CNN Michaels is being compensated for his involvement.

Read more here.