Five Things You Need to Know to Start Your Day: Americas

Good morning. Investors stay upbeat while waiting for Federal Reserve Chair Jerome Powell’s testimony, Citigroup says take profit on AI and [View in browser]( [Bloomberg]( Good morning. Investors stay upbeat while waiting for Federal Reserve Chair Jerome Powell’s testimony, Citigroup says take profit on AI and President Joe Biden’s battles continue. Here’s what’s moving markets. — [Kristine Aquino]( Upbeat session [After the S&P 500 hit yet another record high, US equity futures were buoyant on Tuesday]( while investors awaited clues from Powell on the Fed’s outlook for interest rates and inflation. Treasury yields were little changed, while traders held on to bets for two rate cuts this year. That outlook helped fuel expectations for higher longer-term yields and a steeper curve, even as two-year notes continued to exceed their 10-year counterparts. For the curve to materially steepen, the US economy needs to deteriorate decisively enough to push the Fed to lower borrowing costs, Bloomberg’s Garfield Reynolds [argues](bbg://news/stories/SGA3NNT1UM0W). AI concerns For all the optimism over stocks, particularly those exposed to AI, [Citigroup strategists argue it’s time to take profit](. Sentiment toward AI-exposed equities is the strongest since 2019 and free cash flow at the bulk of those firms is forecast to outstrip analyst expectations. Readings like that typically suggest “significantly more volatility” is on the way, according to the Citi team led by Drew Pettit. And while there may be no signs of an overall price bubble, the rally in some names is “concerning,” they said. Their warning comes after AI has powered stocks to all-time peaks, with Nvidia briefly becoming the world’s most valuable company. Diversification question For investors, the concentration of equity gains in AI stocks should be a reason to check their[levels of diversification](, according to financial planners and market experts interviewed by Bloomberg Businessweek. That’s particularly relevant given that fixed income offers higher rates, which makes portfolio rebalancing more appealing. “For an investor wanting to rebalance, sitting on a lot of gains from equities and on tech stocks in particular, there’s no better time than the present to lock in risk-free returns on cash in excess of 5%,” says Greg McBride, chief financial analyst at Bankrate.com. Biden’s battle [President Biden’s appearance at the NATO summit that begins on Tuesday is likely to be overshadowed]( by domestic turmoil across the alliance. At home, Biden is in a bid to quell angst over his calamitous debate performance and push back against calls for him to step aside. In France, President Emmanuel Macron’s power base has been undercut, while Germany’s Olaf Scholz is similarly weakened after his party’s abysmal results in European Parliament elections. A silver lining for Biden is [continued support]( from members of the “Squad” of liberal lawmakers, most notably Democrats Alexandria Ocasio-Cortez of New York and Ilhan Omar of Minnesota. Boeing troubles [United Airlines said another of its Boeing aircraft lost a main landing gear wheel](while taking off Monday, a near repeat of an incident in March that helped trigger a federal safety review of the carrier. A United spokesman said no one was injured on the flight, which took off from Los Angeles and landed in Denver. The news comes after the company agreed to plead guilty to a criminal charge tied to two fatal crashes of its 737 Max jet. That said, Boeing is discussing a [potential path forward]( with the US Defense Department to preserve its government contract business, according to a person familiar with the discussions. What we’ve been reading Here’s what caught our eye over the past 24 hours: - [Trump taps Miami]( for his return to the campaign trail - China’s mom-and-pop investors [give themselves a sarcastic nickname]( - [Elon Musk’s own brand of cancel culture]( thrives at SpaceX - To challenge Musk’s SpaceX, [Europe turns to old-school spacecraft]( - [Nike brings back retired executive]( to fix slumping retail sales - Metabolic health tracking is [Samsung’s new edge over Apple watches]( - [List of world’s 10 best airports includes Salt Lake City](, surprisingly And finally, here’s what Mark is interested in today The US yield curve should steepen significantly in the second-half of 2024. US policy -- both fiscal and monetary -- would seem to make such a move inevitable. The catch is that this is a directional view that many (including me) have suggested incorrectly several times previously, and it’s starting to appear worryingly consensus again. It was on July 5, 2022 that the 2s10s curve inverted, and two years is quite long enough. An inverted curve has a real economic impact in its own right, by disincentivizing the standard financing model of borrowing short-term to lend/invest long-term. That delivers knock-on (albeit slow and subtle) negative effects for corporate/entrepreneurial behavior. Chair Jerome Powell has made it clear the Fed will have a very dovish reaction function under his watch -- seeking to ease policy if the economy is cracking, even if there’s a lack of certainty inflation will return to target. That makes a bull-steepening yield curve in a true growth slowdown almost a fait accompli, as front-end rates will get slashed, something Garfield Reynolds highlighted as the easiest path for a disinversion. However, if the economy remains surprisingly resilient, that would prove monetary policy isn’t overly restrictive (and that the neutral rate is higher), meaning the economy is particularly vulnerable to another inflationary wave. This would result in a potential bear-steepening (long-end yields rising faster than front-end) if people believe Powell’s Fed hasn’t credibly shown the ability to ever bring inflation under control. Speaking of inflationary impulses, we are heading toward a US presidential election where both candidates show no concern for fiscal deficits or pro-cyclical government expenditure. And that is intensifying valid fiscal concerns at a remarkable pace. As colleague Ed Harrison highlighted Monday, even so-called deficit owls are getting worried. And so they should -- the estimated annualized payments to service the US government debt surpassed $1.1 trillion and are still rising almost parabolically: Mark Cudmore is the Singapore-based executive editor for Bloomberg's Markets Live blog. [Bloomberg Markets Wrap: The latest on what's moving global markets. Tap to read.]( Follow Us Like getting this newsletter? [Subscribe to Bloomberg.com]( for unlimited access to trusted, data-driven journalism and subscriber-only insights. Before it’s here, it’s on the Bloomberg Terminal. Find out more about how the Terminal delivers information and analysis that financial professionals can’t find anywhere else. [Learn more](. Want to sponsor this newsletter? [Get in touch here](. You received this message because you are subscribed to Bloomberg's Five Things to Start Your Day: Americas Edition newsletter. If a friend forwarded you this message, [sign up here]( to get it in your inbox. 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