To The Moon

Bank of America (BofA) has reaffirmed its base case expectation that the Federal Reserve will not implement a rate hike in June, though the bank maintains an inclination towards a hike in the future, noting that it's a "close call".

According to BofA, three conditions need to be met for a Fed rate hike:

1. strong economic data,

2. an increase in the debt ceiling, and

3. subdued regional bank stress.

The bank also believes that inflation remains too persistent for the Fed to commit to a prolonged pause in rate increases.

Even if the Fed decides to forego a rate increase in June, BofA suggests that it will keep the possibility of a July hike on the table.

Maybe we can look at how these 3 conditions can be looked at.

Condition 1 - Strong Economic Data

With the most recent economic data released so far, I will look at U.S. PCE and Labor Data.

PCE

We have a stronger PCE data for April which suggest that economy is strong with consumer personal consumption expenditure going up. So as long as consumers are still able to afford the higher price, economy will remain strong.

Next, let us take a look at how the labor market fare.

Labor Market

The unemployment rate is lower by 0.10 percent for Apr and we have an increase of non farm payrolls, the employed persons also increase.

But overall employment rate is the same as Mar 2023.

Initial Jobless Claims release on 01 June 2023 8.30am (EST)

If we look at the initial jobless claims this week, it actually increase 229k to 232k compared to previous week.

US Continued Jobless Claims also increase from 1.794M to 1.795M.

If this metric is used to determine strong economic data, then economic data is not showing higher.

Let us take a look at how the manufacturing is performing?

US S&P Manufacturing PMI Index 9.45am (EST)

Manufacturing PMI index appear to point to a weak economy as there is a slight drop in the index as compared to previous.

This would not point to a strong economic data.

If we consider all the different economic data, then this condition I would not considered it as ticked.

Condition 2 - an increase in the debt ceiling

As we know that the debt ceiling bill have been approved by the House to avoid default.

Now the deal is onto Senate. We do not foresee any surprise for this increase.

I would consider this to be checked.

Condition 3 - subdued regional bank stress

There was some regional bank stress previously but if we look at the KBW Bank Index ($BKX) it is still not recovering.

Maybe the word subdued is used appropriately, but it also mean we might have another regional bank stress brought upon by other factor.

I think this condition can be checked off.

Summary

After I looked at evidences to support or prove whether the condition can be checked off, what is of importance seem to be the economic data.

Because like Fed has mentioned the economic data will keep come in periodically, unless we really see a proper trend, then we can safely say that the condition “Strong Economic Data” can be checked off.

So if Fed decide not to have a rate hike in June, I would think July would have one, but would it be of higher basis point?

Or rather would you prefer 2 smaller (25 basis point) than 1 x 50 basis point in July?

In the meantime, we can monitor these 3 stocks/ETFs which have potential to ride out any uncertainty.

$Meta Platforms, Inc.(META)$ $Apple(AAPL)$ $iShares Semiconductor ETF(SOXX)$

Appreciate if you could share your thoughts in the comment section whether you think the 3 conditions by BofA is a good way of checking whether a rate hike is impending?

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Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.