9/30/2024

Good Morning.

In today’s newsletter we will cover:

• The state of inflation in the U.S.

• Tesla product unveiling

• Bitcoin rally

• Citibank and Apollo join forces in originating $25 billion in lending

Markets 

State of inflation in the U.S.

The Federal Reserve kept rates at 5.25% from July 2023 to September 26 of this year as it battled to bring inflation to its 2% goal. Now inflation is hovering above 2%. The Fed has begun to ease its restrictive methods against inflation before reaching its goal.

PCE: 2.2%

(CNBC)

Core PCE: 2.7%

CPI: 2.9%

Core CPI: 3.2%

CPI for shelter: 5.8%

Almost all inflation gauges are slowing down, showing signs that reaching 2% could be achievable. However areas like housing are particularly “sticky” and slower at lowering.

There are still significant inflationary forces, both domestic and abroad, to keep an eye on. This includes increased borrowing from the government, a tight labor market leading to wage growth, the large cost of transitioning to clean energy, globalization that is disrupting supply chains, and increased defense spending.

It's important to note that while a lower inflation rate has eased some pressure on American consumers, the cost of living is still significantly impacting many. Lower inflation means that prices are rising at a slower rate. It does not mean that prices are lowering. Inflation will continue to be felt as wage growth catches up. This could be an explanation for strikes throughout the country as unions demand increased wages to afford a higher cost of living. It is an inflationary movement, as producers will have to raise prices to pay for increased wages. It shows that the consumer will still feel inflation and that it won't suddenly evaporate.

The Fed has not officially declared victory over inflation yet. However it remains confident that it can reach its target. This can be seen in the Fed chair’s speech: “with an appropriate dialing back of policy restraint, there is good reason to think that the economy will get back to 2 percent inflation while maintaining a strong labor market.”

It's important to see beyond rate cut mania and watch inflation levels diligently. A data dependent Fed administration could quickly change its outlook if there is an increase in inflation.

Tesla Robotaxi Unveiling 

Over the course of the past few months the market has been pricing in the future revenues that will be brought from the launch of the Tesla robotaxi. Tesla is set to unveil these taxis on October 10th, so it will be interesting to see how the stock performs the week before the event. It is clear by now that Tesla has both the technological and manufacturing capabilities to produce them at scale, however the company is notorious for underestimating the time frame required. The table below displays the stocks performance over the last 6 months.

Rate cuts continue to fuel BTC rally 

Rate cuts by central banks across the globe continue to boost the value of Bitcoin against the dollar. Historically as the borrowing cost of capital becomes cheaper, investors are willing to deploy capital into the riskier asset classes. The crypto currency is up over 10 percent for the month compared to the average September performance of 5.9% decline. A shift in momentum is key as the price has been confined within the $53,000 to $72,000 range. Increased speculation will ultimately drive additional demand.

BTC Current Market Cap: $1.291 Trillion

Deal headline of the week:

Citibank and Apollo agree to originate $25 billion of lending

Banks and private credit lenders have a unique relationship. They often compete for deals but their work is very intertwined. Direct lenders like Apollo borrow from banks and have large sums of cash from limited partners to lend to borrowers. Citibank, an investment bank, earns revenue from originating and conducting other services for borrowers. However, now these loans will not be on Citi’s balance sheet; this is an important distinction as capital requirements and regulation inhibit their lending. 

This deal is beneficial to both groups. Citi is locking in revenue streams that it could lose to competitors of the likes of Apollo, and now Apollo is able to increase its lending. Apollo is aiming to further tap into what it sees as a “$40 trillion market.” It believes private credit meets the demands of borrowers who could not source financing from traditional banks, as well as investors who could benefit from less liquid fixed income products. Apollo is a behemoth in this field and has already made similar commitments as it grows closer to acting like a bank. The partnership aims to originate a staggering $5 billion in the first year. Investors should expect further cooperation between large direct lenders and banks.

We are two college students on a mission to immerse ourselves in the financial industry. We are eager to learn more and make new connections. Our goal is to share exciting and informative content that provides a broad picture of current events and offers valuable insights.

Authors: Ben Banchik, Zachary Singer

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