Closing Bell - Closing Bell: The Battle Between Rates & Tech 5/29/24

Episode Date: May 29, 2024

Will rates or tech decide the fate of the rally? Lauren Goodwin from New York Life and Invesco’s Brian Levitt give their predictions. Plus, venture capitalist Rick Heitzmann gives his take on the rally in the tech sector and if it may be running out of steam. And, American Airlines’ stock had its worst day in 4 years. We explain why and how it’s impacting the rest of that space. 

This make or break hour begins with rising rate fears and whether this record-setting rally is about to be derailed again. We're going to ask our experts over this final stretch of that very question, including super investor Josh Friedman. He joins us in just a little bit. In the meantime, your scorecard with 60 minutes to go in regulation looks like this. Yields backing up. That continues to be the story today. The two-year, we're going to show it to you. There it is, awfully close to 5%. The 10-year over 460, 462 as a matter of fact. Jamie Dimon today saying 6%, not so far-fetched. We'll discuss. If there's one bright spot, it continues to be mega cap tech. Nvidia surge,

unbelievable. It continues today. Almost $1,150 a share. Then there's Apple higher again as well. Amazon is too. That's a big part of this market story. It does take us to our talk of the tape, the battle between rates and tech, one keeping the S&P on edge, the other keeping investors buying in. So which will decide the fate of this rally? Let's ask New York Life's chief market strategist, Lauren Goodwin, and Invesco's global market strategist, Brian Levitt, both, as you see, are with me here post-night. It's nice to see both of you. Nice to see you. Lauren, that's what this is about, right? Rates backing up.

I said the two-year is near 5%, and the stock market doesn't like it because the Dow is down about 400. Yeah, we're seeing a little bit of movement this week with respect to rates, but I think this is just the calm before the storm. We're about to set up for a lot of economic data that will skew the investor perspective in one direction or the other. We're getting inflation data on Friday, manufacturing data on Monday, jobs next week. This is an environment where the balance of risks that the Fed is trying to navigate could very well shift over the course of next week. But you make the argument that the data over the next week is, quote, likely to prove out the Fed's cutting bias and that the PCE is going to be good. Yeah, I think that...

The market doesn't think that. I think that what the market's been hearing from Fed speakers over the past couple of weeks is that their balance of risks is they're really trying to navigate a tightrope where the economic news has been strong, earnings has been strong. That's why we see some of the tech names really still flying and that they haven't seen enough progress on disinflation yet. The all else equal there is the labor market. And I do expect that much like in last month's labor market data, we're going to see continuing signs of slowdown, which I think will give the markets reason to be relatively optimistic about that cutting bias.

Brian, we've seen this movie before. We have. Markets going great. All of a sudden, rates back up. Hello, April lows. And then, you know, rates sort of backed off and we had a rally back. There's an eye set up for that. Well, there's an irony about it because strong nominal growth is good for corporate

earnings. And in a strong nominal growth environment, you don't get rate cuts. But investors should probably prefer strong nominal growth and no rate cuts to weaker nominal growth and many rate cuts. So we've spent a lot of this year with the will they or won't they and when and by how many, how many. Right. And the irony of it is the market, at least the broad market, has done well because we've been in a good nominal backdrop and we've been in a good earnings backdrop. We've narrowed again. We have. I mean, here we are yet again. We're talking about some mega cap names that are driving the bus again. It's NVIDIA. It's Apple. I said Amazon. There are a couple of

others that were like around the flatline that I didn't necessarily want to mention because I wasn't sure if I said positive, they'd be negative when we showed them. But you get my point. I do get your point. And, you know, if you think back to November and December of last year, the market quickly priced in six rate cuts and small caps and mid caps. So think of broadening out, had a very quick bull market. I mean, that was what a lot of us had hoped for in twenty twenty four. And it all happened in two months. Then you had to price out those rate cuts, which, again, is what we're doing. And as you price out the rate cuts, the smaller businesses that tend to have a little bit more leverage get

hurt in that environment. So in order for this to broaden out, you would likely need to see a still reasonably good backdrop, but a Fed that starts to slowly normalize the yield curve. That would be the proverbial no landing or maybe really soft landing that investors have been looking for. It's a funny market. One minute, it's a good news is good news market. And the next minute, it's a good news is bad news market for the very implications that Brian laid out. What it means for the Fed, what it means for possible rate cuts, how many we're going to get and when. Do you think the market can accept the fact that good news is, in fact, good news and that rate cuts don't matter because the economy is still good? I think that we have been seeing that since April.

This, I mean, as Brian mentioned, we've moved from an environment over the course of the year where we were expecting six rate or the market was pricing in six rate cuts. We've moved to one and a half. And with the exception of a little bit of tumult in April, it's been a pretty easy going process. I think we've seen rates have come down, right? Rates have come down. They allowed the market to rally back. Now here we are. Rates are backing up again. And the market has a couple of days where it looks like it's falling apart a little bit.

Here's what I feel pretty confident in that's been swirling around the market in the past couple of days. I think it will be very, very difficult for the Fed to hike rates. And that's not because 25 basis points higher makes a real meaningful economic growth difference. It's because the signal that that sends to the market, it would be very likely to tighten financial conditions. Even the breadth of potential rate hikes, I think, would contribute to a slowdown in the data that'd be relatively rapid. Scott, good news is bad news so long as inflation is above three.

OK, and so we're going to get a personal consumption expenditure report on Friday. We'll all be looking at the year over year and the core and the super core and whatever else we want to look at and gauge whether, you know, that being the Fed's preferred measure is back closer to the comfort zone. And we can get back to a point in which we're applauding good news. Now, the core piece or the PCE, if I remember correctly, is a little bit below three. So the Fed's preferred measure is getting there. The headline's still a bit elevated. So until you see that number firmly in the perceived comfort zone, then good news will still be challenging for the markets like you're seeing today. I had somebody suggest, Brian, earlier today that the market was, quote unquote, unhealthy right now because it's top heavy yet again. You have NVIDIA, you know, dominating. Otherwise, I mean, the S&P would look ugly, much uglier if NVIDIA and Apple weren't doing what they're doing. Is the market unhealthy?

I mean, it's certainly top-heavy and concentrated. Is it unhealthy? It could be healthier. And to be healthier, you would need the broadening out, to your point. Now, if you look at an equal-weight portfolio, valuations are about average. So it's not as if that market has been significantly hindered. Valuations are about average, but for a lot of the companies in the S&P 500, it requires a catalyst. And that catalyst would come from either the growth remaining strong

with inflation in the comfort zone or the Federal Reserve normalizing the yield curve over the subsequent months. Lauren, what do we make of, Jamie Dimon's been talking a lot about risks that others aren't necessarily paying enough attention to. That's what he gets paid for. He gets paid to manage that risk, and he does it obviously awfully well, which is why he has the standing and gravitas in this market that he does.

And when he talks, people listen. He said today, 6% rates possible. That's at the Bernstein conference. The chance of stagflation, he said, is, quote, higher than most people think. Now, he says a lot of things and people sort of say, Jamie, that's just Jamie being Jamie. And then they sort of brush it off. But there might come a time where we actually need to pay attention a little more closely to what he's saying. Is that one of those times? Again, when it comes to the risk of rates moving higher, I think that that risk would be likely to cause stress in the market before it was able to materialize.

I think that market financial conditions tightening would precipitate a backup in rates, a deterioration in valuations, and a Fed that would be much more cautious about actually having to act on those things. Now, that's still a pretty unnerving circumstance for investors, right? And though I do feel confident that this rally has a bit more room to run and that valuations are not a good market timing tool, it is an environment where we have been taking some of our gains in equity, especially in the top names, and activating them in fixed income. You have. Yes. Moving, still taking equity-like risk in fixed income because of where we think the economy

is. So looking at high yield, especially in the short duration segment of the yield curve. But I do think that it's an environment that is, to Brian's point, could be healthier, but we have to acknowledge where the benefits are as well, which is in this valuation and in the income potential that we see. This is the problem, right? You know, I've had people suggest, well, you're finally going to get money coming out of money markets that's been parked there, and that's going to stimulate the market further. Lauren makes a good point, though, and suggests, well, now you've got bonds attractive again. Yields are up, prices are down.

Now they're an alternative yet again to stocks. Yeah, T-bills and chill, right? But the thing about the money market is if you track the data, a lot of that came from bank deposits. So if you're sitting in the four big money center banks earning nothing, a lot of that went to money market as an alternative to earning zero. So it doesn't necessarily come flooding back into the market or the bond market, although I do think the bond market is attractive, lock in the yields that are available. A couple of other quick things. We were also warned of economic hurricanes. We have not seen economic hurricanes. And I don't think it's stag or flation. You know, maybe I sound like Linda Richmond from Saturday Night Live. Well, you sound

like the Fed chair himself who said, I don't see this dag or deflation at the last meeting. He stole my line, or I'm stealing his line. Yeah, probably the latter. Probably the latter. I hate to break it to you. But no, look, people like to picket what Mr. Diamond says and say, well, he's called for hurricanes, he's called for this, he's called for that. He has the ability to see things that

others don't necessarily either see or want to admit. And OK, so they haven't come to fruition this time. Now, there was a moment where commercial real estate got ugly and we had some regional bank issues that JP Morgan ended up taking pretty good advantage of through a purchase that they made. But nonetheless, maybe it's time to be less complacent than some suggest these markets are. Well, when I look at the guideposts on the path to an end of a cycle, the first things I would assess are, is there a lot of leverage in the system? Is there a lot of excess? Now, it doesn't appear to be a lot of leverage.

You think about excess. We actually came into this without enough inventory, without enough homes. So it's not excess. Yes, the Fed raised rates, but most Americans have fixed rate mortgages and have not felt the effects of it. When that happens, growth usually slows, credit spreads widen out. That hasn't happened. And the bankers tend to then tighten lending standards. And that hasn't largely happened. So if I stick to my guideposts of when do you start to see things, you know, become disconcerting, the only one we have right now is the inversion of the yield curve. We've been there now for, I think, 19 months. Well, you know, we'll see. There are the lagged effects of it. But if there's not a lot of leverage in the system,

then perhaps it doesn't hit the way it has in past cycles. Which is why stocks have been able to rally to record highs. We've got to leave it there. Guys, thanks. Lauren, thank you. Brian, thanks as well. Tech, the standout sector off the April lows, as you know, gaining more than 16 percent on the back of NVIDIA's relentless run. But is that rally running out of steam? Let's ask First Smart Capital's Rick Heitzman. He's here with me at Post9 as well. I'll pivot this way and see you. Welcome back. How are you?

You look at NVIDIA. You've been in the tech business a long time, investing in these kinds of names. Your reaction to this relentless run, as we said, is what? They see incredible fundamental demand. Their numbers are incredible. They continue to put up numbers, even at scale. And what you're seeing is, so far, there's no end to the appetite for AI infrastructure. And until we see that infrastructure overbuilt, I don't think that demand is going to diminish.

So analysts keep taking up their numbers, right? They keep taking up their estimates. I was with one tech investor, notable tech investor yesterday, who said their numbers are 40 percent above the streets. Yep. That's the amount of optimism that remains in this name. Is it all justified? I think some of it's justified. I mean, this is going to be a year we've shared. We've talked about this before. The 2024 is a year where the chickens come home to roost on AI. You know, so NVIDIA is building out the infrastructure. There's going to be some tooling and there's going to be some applications. Are those applications going to be able to be delivered? And are they going to be able to deliver value for their customers, either enterprises or consumers?

And as long as that continues to happen, people are going to have almost insatiable demand for NVIDIA. The thing that would not happen is if you see ChatG GPT fall off, you see Microsoft Copilot fall off, you see a slowing in funding of the thousands of AI startups who were all in the market buying infrastructure. When that starts to turn, it's going to be similar to what happened to Cisco 25 years ago when the demand slowed for infrastructure. How much on a 1 to 10 scale of worry in your mind? A 3. I'm a solid 3. I think that these applications are able to show real value. A lot of companies that we've invested in and we've seen are able to show real value or real ROI for the enterprise by automating

workflow and doing jobs. And even the beginning on the consumer side of AI being able to do jobs. So're confident at least in the first couple innings that it'll be more than incremental and will fuel this growth. Do you look at the you know periphery of the key players like the NVIDIA's and say you know what the halo effect that some of these other names have gotten is just too much and it needs a correction in and of itself. How do we look at these other names have gotten is just too much and it needs a correction in and of itself. How do we look at these other names that have gotten the NVIDIA bump and maybe don't deserve it as much? I think NVIDIA is a one-on-one company. So they don't deserve their, you know,

kind of like NVIDIA and therefore should be trading at a slight discount to NVIDIA. I think that's a false flag. I think that NVIDIA is a one-on-one company. There's other companies which are benefiting from this incredible demand for AI infrastructure, but they shouldn't be in the same conversation if you think about multiples or if you think about potential market size as NVIDIA is. You look at software versus chips. Chip names have done quite well. Software names have been a little weaker.

The thought being, well, all of the capex that's being spent by the hyperscalers, the mega cap companies that we talk about every day, is going towards the chip names rather than some of the software names. How do you view the difference between the two spaces, one going up, one going down, and the kind of investments that you yourself would be looking to make in the future? So I think if you need the chip makers to build out the infrastructure, there's another layer of data, data models, data enablement, and we've talked about the Databricks, DataIQs of the world in the past that enable then the application layer to do its job, and whether that's workflow around enterprise software or consumer software.

So NVIDIA needs the application layer to thrive in order for there to continue to be demand because that end user demand is what's gonna drive demand through that whole activity chain and through that supply chain and infrastructure. So, we think there's a timing factor and as private market investors who are focused on the medium and long term,

we're investing heavily in the application layer with the expectation that the infrastructure and foundation of this next generation of artificial intelligence will be built up. Unless you're an idiosyncratic story with a great story to tell, not every company that you've invested in, by the way, is an AI-related company. But do you need to be to capture the imagination, to be in the zeitgeist of where everything is being talked about? If you don't have AI as part of your play, are there enough dollars to go around to you? For a GLP-1 company. But besides that, you know. Which you are an early investor in. Yes. All right. So you talk in your book a little bit. Well, you don't need

to joke. I mean, it is actually, it's one of the other areas, right? The one part of healthcare that's done really well at GLP-1. Which has great fundamental demand and a fundamentally new way to think about the world. But I think every company we look at has some facet of AI. If you're not writing software today, you're using AI to help you write that software, AI to help you check it, load balance it, and deliver that software, you're going to lose. And a lot of the bets we're making on the earliest stage technology companies are companies are saying, hey, I'm going to look at this facet

of software, supply chain, CRM, logistics, but we're going to superpower that using AI. We're going to need less people and we're going to make better, faster, stronger software. And that's going to be the next generation leaving behind folks who have not invested in AI. State of the capital markets. And, you know, I like to always get the temperature from you because we see you, you know, maybe once every couple of months. So it's a good chance to check in. Where are we on that? And let me ask you this. The longer that the IPO cycle delays, does it increase the likelihood that some of the companies that you've invested in that are a little further along the growth train get bought rather than go public? So to answer the two questions, I think we're still in a kind of a cool phase of the IPO market. I think a lot of people thought the second quarter might be stronger than what we've seen. And some of the volatility we've talked about, uncertain rate environments, uncertain capital markets have paused that. You'll still see, hopefully, a couple people

go out in Q2 and maybe one or two squeeze out in September prior to the elections. The elections are a huge overhang. And I think you're right. The longer that people stay private, the more need there is for liquidity for early investors like me, for employees, for founders. And that's going to put pressure on the system. At the same time, a lot of the large companies are kind of in the M&A penalty box. The mega cap public companies also have to deal with this orthogonal issue called the FTC, which is holding them back. So, you know, both the classic levers of liquidity, large cap tech buying you and IPO have kind of been stalled. So we're still in this purgatory and I think we'll remain there

through the election. All right. Good thing. Good check in on all things tech. It's good to see you. Yeah. Rick Heisman of Firstmark joining us once again at Post 9. We're just getting started. Up next, raising the red flag, new data revealing some potential concerns over commercial real estate. Canyon Partners' Josh Friedman back with us to break down what he is seeing in that space and how he is navigating the uncertainty. He'll join me at Post 9 right after this. We're live at the New York Stock Exchange. You're watching Closing Bell on CNBC.

We are back. Worries over commercial real estate bubbling up again last week with word of losses in even the highest rated mortgage bonds. It's the first time that's happened since the financial crisis. How much more pain could be on the way? Josh Friedman is co-CEO and co-founder of Canyon Partners. He joins me here at Post Nice. Nice to see you again. Nice to see you too, Scott. So this is quite topical given some of the headlines we had last week, SREIT and limiting redemptions and such. I mean, you've been warning about more carnage coming in this space. How concerned are we now that we see these kinds of headlines? I think there are concerns that are shared both across the real estate spectrum and across the corporate spectrum. You've got rates that are stubbornly high and are unlikely to be reduced

anytime soon. And maybe they're not likely to be hiked either, but in my opinion, they're not likely to be eased anytime soon. And you have a lot of balance sheet maturities coming up where people need to refinance in a world where rates are twice what they used to be. In real estate, it's compounded by the fact that there have been significant changes in where people live and work and how they live and work. So it's met obsolescence of certain property types on top of that interest rate issue. These bonds in question of last week related to one specific building in New York City. So we're not trying to make a mountain of a mole hill by any stretch. But are those rumblings of things that will be duplicated or are they just

idiosyncratic one-offs based on one building here and there? I'm sure there are other buildings here and there. That one was a unique combination of almost every bad factor you could have. A somewhat obsolete building with a very, very large single tenant vacating and a lot of debt coming due at the same time and no one to replace that tenant. And the carnage was significant, with even the AAAs being significantly impaired. That may recur here and there. I think that what will recur a lot is the situation with respect to B office. We've seen that already.

These problems tend not to bubble to the surface until they actually default. There's no reason for them to bubble to the surface before that point. But that's product obsolescence on top of balance sheets that were created in a world of very, very low interest rates, where people were desperate to put their money into something with a yield. And so they over-leveraged these properties. You alluded to the fact you don't see rates coming down really anytime soon. Is that saying that you don't think the Fed is going to cut rates at all this year? I'd be surprised if they cut rates certainly before the election. You've got a lot of factors that that mitigate against them cutting rates. You've got a very strong stock market that has produced maybe $9 trillion of value to consumers in the S&P

alone since the end of 2023. You've got home values, which are higher. So the consumer balance sheet is strong. Unemployment is stubbornly low. We continue to have good jobs numbers. We continue to have somewhat stubborn and surprising inflation numbers. So it's not clear to me why the Fed would rush to lower rates when they want to keep that tool in their pocket. And yet, on the other hand, you have not just these

real estate balance sheets that are then forced to refinance in a high interest rate world. You also have the federal government balance sheet, which is loaded with debt and has to finance in a higher interest rate world. And you have something on the order of $80 billion worth of corporate high yield bonds trading at something like a 15% yield or higher or 70 cent price or lower. So people need to refinance. People took on a ton of leverage when the cost of leverage was low. So now we're going through the adjustment process, both in real estate and in the corporate world. And I mean, the corporate world is where you see the biggest opportunities now.

I mean, you sat down and said, seems like we see, seems like there's a new name every day. Well, you have a nice combination of some very good companies with very good private equity backing that just have too much debt. They leveraged up seven, eight times EBITDA with debt that was very low cost. The time period for getting the earnings up and outgrowing that debt balance has been shortened by the interruption of COVID, in some case, interrupting revenues as well as earnings. And now those things have to be fixed. And there seems to be a new name every week where the sponsor says, OK, it's time for me to fix this balance sheet. That's a complicated game, Scott. And it can be a pretty nasty game, both with the sponsors and with fellow creditors. But it's one that I think is repeated in the context of generally a pretty

good economy and generally pretty good companies. And that's a good background for playing the game of restructuring balance sheets. You think there's going to be more, you know, corporate distress going forward the longer that rates remain as elevated as they are, if not, you know, potentially back up even further? I don't think that rates will go up, partly because the government itself has to finance its own balance sheet, partly because it's so targeted on real estate, which is already so distressed and which is kind of an epicenter of a lot of the bank, commercial bank investment. But I also think that rates aren't necessarily the problem because you can lower rates 250 basis points and you'll still have a significant number of companies that are over

leveraged and can't have positive interest coverage. These companies need more equity. They may not be bankrupt in the sense of having value that's less than their debt balances, but they can't sustain these debt balances in today's interest rate world, even 100 or 200 basis points lower, and still amortize debt and have a sustainable business model. Would you point to an issue that potentially hasn't been realized, so to speak, just yet, but will continue to get potentially worse before there's a larger problem? Most sponsors try to look out in the future and take care of things in advance. And we're starting to see with each passing week, another company that hires a restructuring advisor, that hires

a set of attorneys, they start to make threatening noises about how they can move assets around the balance sheets, which, by the way, they can do because a lot of the debt that was done in this era of excessive exuberance and very low rates were done with pretty poor covenant protection. So you have to be very careful when you're involved in these situations, not only about who the sponsor is, but also who your bedfellows are in the same tranche of debt that you owe. I want to ask you about private credit. Jamie Dimon and others have been speaking a lot about it lately. Even today, he said that he expects problems to emerge there and warned that, quote,

there could be hell to pay. And he alludes to the fact that a lot of retail clients who had no exposure whatsoever to alternatives and now things like private credit have been put into the space. He says, quote, you want to give access to retail clients on some of these less liquid products? Well, the answer is probably. But don't act like there's no risk with that. I've seen a couple of these deals that were rated by a ratings agency, and I have to confess, it shocked me what they got rated. It reminded me a little bit of mortgages. He's alluding to the great financial crisis. You share any of those concerns? I don't think it's like mortgages where there was just widespread fraud in the securitization of those mortgages. And the level of mortgages relative to the value of the properties was completely

off any kind of historical trend line because of the appetite to issue that product. But what I do think is that there are different types of private credit. There's the more custom bespoke, where you sit down with the issuer and say, OK, you've got too much debt. You put in some money. I'll give you a break on this. I'll defer some coupons. I'll lower the balance a little bit.

But now you've got to make a balance sheet that works. That tends to be a one-on-one, two-on-one, three-on-one discussion with a lot of negotiation. And that type of private capital solution debt, I think, is extremely attractive right now. What's become a bit less attractive, perhaps, is the more broad-based unitron acquisition financing debt where there was just so much capital assembled so quickly that it outdistanced the number of deals in which to deploy that capital. That's probably a trillion seven trillion eight market and easily a half a trillion of that is sitting unspent on the sidelines and there are so many firms that have grown their dry powder in that area that if an issuer wants to raise private credit money,

the competition is based on low covenants, maximum lending proceeds, and lowest interest rate. That's not a good formula. And that's probably more what Jamie's referring to. I appreciate your insights on all of this. It's good to see you. Thanks for being here. Thank you. That's Josh Friedman right here at Post 9. Up next, prepping for PCE, another critical piece of inflation data looming over these markets. Goldman Sachs' Jan Hatzi, as he is here with his expectations and his prediction for when the Fed might actually cut rates. Closing bell's coming right back. Welcome back. Stocks are in the red today

across the board. The 10-year Treasury yield ticking higher for the second day. So is the two-year. And that's a problem as investors look ahead to Friday's core PCE report as the next key piece of inflation data to determine the Fed's rate cut timeline. Joining me now, post-9-2 discuss, is Jan Hatzius of Goldman Sachs. What's the PCE? It's nice to see you. Hey, good to see you. What is the PCE going to tell us on Friday? Our estimate is 26 basis points. And we talk about basis points now. We used to talk about tenths of a percentage point, but we have, I think, a reasonable idea that it's going to be somewhere in the mid-20s, just based on what we saw in the CPI and the PPI and the import price numbers.

So that would represent, I think, a significant amount of progress. I think it's also important to look at the market-based core PCE number, which we think is going to be just under 20 basis points. And that leaves out imputed prices like, for example, financial services, which are extrapolated from stock market movements and may not be really representative of inflation. The point you make, though, is that it potentially brings these cut conversations back into the forefront because it would theoretically give the Fed comfort in thinking that it could cut rates. Well, it's a step in the right direction after three steps in the wrong direction or first

quarter in the wrong direction. So it doesn't undo what we saw in the first quarter. But if we get continued moves, you know, in the 0.2% range over the next several months, then I think, yes, that will give the Fed comfort and ultimately can still get you a cut by the September meeting. Remind our viewers, because things change, you've changed your view from time to time. How many cuts do you think we're going to get this year as of today? We've got two cuts, one in September and one in December. And you're sticking with that for now? We're sticking with that. Obviously, it's always subject to what we find in terms of inflation data, in terms of labor market data, and in terms of the committee's reaction function. I think one other important data point, probably more important, frankly,

than the core PCE number, is what we see in the next employment report at the end of the following week. We have seen some deceleration in the labor market. Nothing too concerning, I would say. This looks like a healthy deceleration. But if we were to see more deceleration, I think, again, that would support the idea that maybe we should take a small step down. Do you think that the economy, as reasonably strong as it is today, can withstand a scenario in which rates remain this elevated throughout the remainder of the year and that they don't cut at all? Well, I certainly think that's a possibility. Again,

it's going to depend on the data. If we find that the economy can withstand a higher level of rates and if the inflation data maybe continue to surprise on the upside, then I think they could do nothing. And that could be OK. My best guess, though, is that as inflation comes down again and the labor market continues to look more in balance, that they will say in order to rebalance the risks, it's better to cut a couple of times. And you don't think that September, which is how you moved your first cut back to, is hindered at all by the election? You don't think that's too close? We do not, no. We think what matters is really the economic data, and the committee will make decisions based on the economic data and will leave the politics out of it.

I would also note, in the last press conference, Chair Powell was asked that question, of course, as expected. And he gave an answer that was, you know, very detailed why they do not take politics into account. It wasn't just a perfunctory we don't take politics into account and we take them at their word. But if we take the calendar, you know, at face value, you've got—let's take your timeline into consideration. So, September, we go. The next meeting is the day after Election Day. Can you imagine a scenario in which they cut in November, or is this September-December is your best guess?

I can imagine a scenario in which they cut in November, right is this September, December is your best guess? I can imagine a scenario in which they cut in November right after the election. I can imagine a scenario. I think it's less likely that they would do back-to-back cuts in September and November unless the economy slowed more sharply. I think the more likely path for rate reductions, by the way, in the U.S. and also in other G10 central banks that are starting to cut, is that they go every other meeting. Because it's mainly normalization cuts. It's not cuts designed to, you know, to target or combat a sharp downturn in the economy. It's because they cut because they can, not because they have to. And because inflation is closer to normal,

and they are at abnormal levels of short-term interest rates. Lastly, you mentioned when you sat down that, you know, other central banks are about to begin the cutting. What sort of pressure, if any, does that put on our central bank and our Fed? Not to let the distance between the central banks get too far. I don't think it's pressure per se. I do think that the Fed makes its own decisions. Obviously, the mandate is the U.S. economy.

With that said, I think cuts from the Fed would be somewhat welcome by other central banks. And if all else is equal, that may be a factor, arguing for cuts. But the primary issue is always what's happening with U.S. inflation, what's happening with U.S. employment. All right, Jan, good to see you. Thanks for coming by. Nice to see you. Artean Hatsias of Goldman Sachs here, Post9. Up next, we are tracking the biggest movers

into the close. Christina Partsenevelos is standing by with that. Christina. Pet adoption rates are up, and that means spending for one retailer. We discuss the stock impact and much more after the break. We're a touch less than 15 from the closing bell. Let's get back to Christina Partsenevelos now for the stock that she is watching. Tell us, please. Well, Scott, it seems like nothing gets in the way of people spending on their pets, or at least that's what Chewy's latest earnings report is showing us with their earnings beat,

their share repurchase program, and you can see their subsequent 27 stock pop right now management also says pet adoption rates are climbing post-covid again which bodes well for spending advanced auto parts or advanced auto parts posting a surprise sales decline in its first quarter with the ceo acknowledging the year started off slower than anticipated because of bad weather and a challenged consumer. The auto parts retailer points to continued cost-cutting as a way to hit its full-year revenue guidance. Shares are down 10%. Scott?

All right, Christina, thank you. Still ahead, American Airlines stock is dropping and dropping hard in today's session on some serious growth concerns. We're going to bring you the details, tell you how the rival airlines are holding up as well. We are back on the bell right after this break. NVIDIA shares on a record run this year, and some chart analysts are saying it may be time to take some profits in that name. For more details, you can head to cnbc.com slash ProPIC

or scan the QR code on your screen. Up next, Salesforce reporting results in overtime. We're going to tell you what to watch for when those numbers hit the tape at the top of the hour. That and more inside the Market Zone next. We're in the closing bell market zone. CNBC senior markets commentator Mike Santoli here to break down the crucial moments of this trading day. Plus, Phil LeBeau on American Airlines tracking for its worst day in some four years.

And Steve Kovach looking ahead to Salesforce earnings. They are out in OT. Mike, I begin with you. I mean, we're 1,500 points off of 40K. I mean, that happened kind of quick. It did. Less than two weeks. You know, the S&P is still up almost 5% this month, but it doesn't feel like it because you've given back a good percentage of that four-week rebound.

It's pretty slippery footing. Breath is, again, atrocious today. It's actually very skewed to the negative. And it's a playbook that we are familiar with in terms of when bond yields start to make a run, it causes this cycle of questioning of whether it's happening for the right reasons, whether higher for longer in response to sticky inflation or lots of Treasury supply can be handled by the economy. Now, most indications are probably so at this level, but you are seeing a lot of the leading indicators of both cyclical strength and inflationary pricing pressure come back off their highs. That's industrials, it's homebuilders, it's auto insurers. It's all the things you'd actually want to see soften up if on a macro perspective you want to see inflation

become more friendly. So that's kind of the good news version of this, even as it causes a little bit of churn and hesitation about the equities themselves. We've been unsettled before and not that long ago by, quote unquote, bad bond auctions. And then we were soothed by good inflation reports. Maybe we're set up for that. We're going to find out because you get PCE on Friday. We probably would be. And, you know, even the auctions this week, I mean, they haven't been great in terms of showing heavy demand at these levels,

but they also haven't been very destabilizing. I mean, yields are down from their 1 p.m. highs on the 7-year auction, on the 7-year maturity, which was auctioned today, and even the 10s. Now, still, you know, we're near these multi-month highs. You can't get comfortable. But I do think it's all happening in the context of an incomplete pullback in April. We got back up to the highs. People had heavy equity exposure. There's not a lot of conviction outside of the very small number of AI plays. And we're just kind of spilling back off those levels. Phil LeBeau, tell us about American Airlines. We're looking at the worst day in, what, four years? Yeah, and it's dragging down really all of the airline stocks, with the exception

of United Airlines. Look at the big four right now. United is fractionally higher on the day, or was earlier today, mainly because it reaffirmed its Q2 guidance. But then when you look at the rest of the sector, what's the problem? You mentioned it, Scott. American Airlines, the Q2 warning due to a number of factors, including its execution, poor execution, costing itself sales when it comes to corporate customers. But it has raised questions about whether or not domestic demand is softening. We just had the busiest day ever, according to the TSA.

The numbers don't back up that demand is softening, but it does also raise the question for investors, where's the catalyst? And that's why when you take a look at the airline index, there's no traction here. And it hasn't been for some time in terms of where the airline stocks are at. And a number of people are looking around saying, if you want specific growth within the airlines, now's the time when you've got to pick and choose those that are performing versus those that are not. Phil, I appreciate it. Phil LeBeau with the story on American and the airlines in general leads me to Steve Kovac with Salesforce. I mean, the big disconnect in the tech trade has been software, right? It's the area that has not done all that well. We'll see what Salesforce delivers. What can you tell us? Yeah, you nailed it, Scott. The question for Salesforce and other enterprise software companies,

where is the AI money coming? Well, we've seen AI sales flow to those hyperscale cloud companies like Microsoft, Google, and Amazon, and of course, NVIDIA on the chip side. Not much happening with AI software sales. That goes for Microsoft, too, by the way. Especially true in the enterprise, Salesforce has been hyping its AI platform called Einstein since last year. And we already know the story behind Salesforce's turnaround last year following all those job and cost cuts. So AI monetization story, that one is less clear for investors. So here's what to look for. Commentary from CEO Mark Benioff about sales and its data cloud, which it says secures customer data for its AI tools. Last quarter, he said a quarter of its deals under or over one million buy into data cloud. It's still

tiny, but Salesforce, meanwhile, has been down 12 percent over the last three months, Scott, underperforming a lot of its peers. Steve, all right, thank you. We'll see you in overtime. You're getting ready for the close here, obviously, which is why you have the clapping already starting. The bell rings on time. It's not a little early. Get a little excited. You never know. Yes, they sometimes jump it. Meanwhile, there's a little modest bit of suspense in terms of where the S&P is right now. Fifty-two fifty-ish is last week's low. It was also the March 28th high. So that's kind of the little bit of a test of, did this little break to a marginal new high mean something? Are we

going to have to pull things back a little bit farther? So that's your initial benchmark of, are we just bouncing around this new range, or is it something a little bit worse than that. Russell, down one and a third percent today. Elsewhere, you've had weakness in utilities, industrials, materials, and energy. The utilities weakness combined with the fact that consumer staples and pharma have not been good are almost reassuring because you don't want to see traditional defensive areas

start to rip when yields are higher because that would mean they're clenching up for something worse on the economic front. All right, this time the cheers do signal the bell. The bell is near. In fact, the bell is ringing. The Dow is going to lose more than 400. I'll see you tomorrow in the OT with Morgan and John.