Dear Friends,
For the past two weeks, we’ve seen the markets pull back due to geopolitical tensions and sticky inflation data. Meanwhile, we’ve also seen the markets rebound after strong earnings were released from S&P 500 companies. The mixed picture is testing the market participants’ risk appetite for future opportunities, especially when the Fed meeting next week will provide an update on monetary policy. Find out more about what is driving the markets in this week’s newsletter.
Economy, Geopolitics, and Commodities
1. Key Fed Inflation Measure Rose in March
Inflation showed few signs of letting up in March, with a key barometer, the Federal Reserve watches closely showing that price pressures remain elevated. The personal consumption expenditures price index excluding food and energy increased 2.8% from a year ago in March, the same as in February, the Commerce Department reported Friday. That was above the 2.7% estimate from the Dow Jones consensus.
Including food and energy, the all-items PCE price gauge increased 2.7%, compared with the 2.6% estimate. On a monthly basis, both measures increased 0.3%, as expected and equaling the increase from February. Markets showed little reaction to the data, with Wall Street poised to open higher. Treasury yields fell, with the benchmark 10-year note at 4.67%, down about 0.4 percentage points on the session. Futures traders grew slightly more optimistic about two potential rate cuts this year, raising the probability to 44%, according to the CME Group’s Fed Watch gauge. Consumers showed that they are still spending despite the elevated price levels. Personal spending rose 0.8% in the month, a touch higher even than the 0.7% estimate though the same as February. Personal income increased 0.5%, in line with expectations and higher than the 0.3% increase the previous month. 3
2. Focus on Fed Decision Next Week
The U.S. Federal Reserve announces a decision on next Wednesday. Interest rates are fully expected to be left on hold, but all eyes will be on the statement for any signals on prospects of interest-rate cuts this year. With data consistently showing U.S. inflation remains elevated while the economy and the consumer hold up well, Federal Reserve officials have increasingly suggested that a rate cut won’t happen any time soon, and even the prospect that the next move could be a hike isn’t out of the question.
Money markets are now only fully pricing in one rate cut in 2024, potentially as late as December, a massive fall from the start of the year when they were pricing in a total of 150 basis points in rate reductions, according to Refinitiv. Fed Chair Jerome Powell recently said that firmer inflation in March had likely pushed back the timetable for starting rate cuts. Although an outlier, Fed policymaker Michelle Bowman said earlier this month that it was possible that interest rates could have to move higher to control inflation while several others have hinted at possible delays to rate cuts. “What will be interesting [in the Fed announcement] is any shifts in the rhetoric. There could be a change in the wording of the statement for example, or Powell, in his post announcement press conference could be more cautious regarding potential interest rate cuts,” analysts at Investec said in a note. Moves in U.S. Treasury yields will be closely watched as the 10-year yield edges closer to the key 5% mark.1
3. Bank of Japan’s Stand Pat Decision Fuels Further Yen Jitters
The Bank of Japan held interest rates steady and simplified its language on bond-buying and policy, an outcome that pushed the yen down to a fresh 34-year low and stirred up market jitters. The BOJ Friday kept the range for its benchmark rate between 0% and 0.1% as widely expected by economists at the conclusion of its meeting, according to a pared-back statement with only a few lines. The central bank didn’t signal a reduction of its bond purchases, saying instead it would buy them in line with its March decision. Despite higher inflation forecasts and a reiteration of the central bank’s resolve to raise interest rates if the projections materialize, the yen broke quickly through the 156 mark against the dollar prompting warnings from Finance Minister Shunichi Suzuki.
The currency’s weakening momentum appeared to be picking up speed as Governor Kazuo Ueda played down the impact of the weak yen on fueling inflation. Around 5 p.m. that movement abruptly reversed course, with the yen strengthening sharply from around 156.70 to 154.99 in a move reminiscent of what happened in September 2022, when a slide by the yen during a post-decision BOJ briefing was halted by intervention. Market participants said Friday’s movements didn’t look like actual intervention, however.2
4. Euro-Zone Inflation Set to Hit First Bump in ECB’s Road to 2%
The slowdown in euro-zone inflation may have stalled in April for the first time this year, just after a quarter when the economy shook off the shallow recession it suffered in late 2023. Consumer prices probably rose 2.4% from a year earlier, matching the outcome for March, according to the median forecast of economists surveyed by Bloomberg. They anticipated gross domestic product to have risen 0.1% in the first quarter.
Those reports on Tuesday may chime with the European Central Bank’s view at its decision earlier this month, when President Christine Lagarde described the economy as weak, and predicted “bumps on the road” for the path of inflation. With that outlook in mind, policymakers are gearing up to cut interest rates at their June 6 meeting, dialing down constriction on the euro zone after an unprecedented cycle of tightening. While the overall inflation number may stay unchanged after Middle East tensions caused a surge in energy costs, the underlying measure that strips out such volatile items may provide reassurance to officials that the direction of travel is still downwards. That gauge is expected by economists to have slowed to 2.6% in April, marking further progress toward the 2% goal. Policymakers reckon that inflation will reach that target in the middle of next year. This week’s national reports may further validate Lagarde’s outlook of volatility in the data. Inflation measures in Germany and Spain, both due on Monday, are expected to show an uptick, offset by weakening from those in France and Italy published the next day.2
5. New Home Sales Inch Higher Despite 7% Mortgage Rates
While the spring housing market has been plagued with low supply, high prices and spiking interest rates, would-be homebuyers are turning their attention towards new construction. The reason is there’s more availability and incentives compared to previously owned homes. “There’s more opportunity in new construction,” said Nicole Bachaud, a senior economist at Zillow Group. About 693,000 new single-family houses were sold in March, up 8.3% from a year ago, according to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development. The median sales price was $430,700, the agencies found. Meanwhile, sales for previously owned homes dropped 3.7% from March 2023, according to the National Association of Realtors.
Many areas in the U.S. are facing a low inventory of existing homes as the mortgage rate lock-in effect, or the golden handcuff, keeps “existing owners from becoming sellers,” Bachaud explained. With 30-year fixed-rate mortgage rates sitting above 7%, homeowners who bought at much lower rates of recent years don’t like the prospect of trading in their low rate for a higher one. Meanwhile, buyers are turning to builders, who are typically more flexible when it comes to pricing. Homebuilders offer buyers incentives like rate buy-downs, price cuts and can even pay for closing costs, experts say.3
6. AI May Hold a Key to the Preservation of the Amazon Rainforest
In recognition of Earth Day earlier this week, we wanted to share an interesting article about how Artificial Intelligence is being used to help protect the rainforest.4
Financial Markets
1. S&P 500 Posts Best Week Since November
Stocks jumped Friday, and the S&P 500 and Nasdaq Composite headed for their best week since November as Big Tech names rallied on strong earnings and traders pored through fresh U.S. inflation data. The broad market index advanced 1.2%, while the tech-heavy Nasdaq climbed 2.2% and headed for its best day since February. The Dow Jones Industrial Average rose 200 points, or 0.5%. The S&P and Nasdaq are on pace for their best week since November. The S&P is up 2.8% and slated to snap a three-week losing streak, while the Nasdaq has gained more than 4% and is headed for its first positive week in five. The Dow is up 0.7%.
Stocks got a boost from robust results from artificial intelligence competitors Alphabet and Microsoft after the bell Thursday. Both companies have impressed investors by not only investing in artificial intelligence, but also by showing results. Exxon fell, and Chevron edged higher. Their run of record-setting profits appeared to be tapering off. Front-month Brent crude oil futures rose, finishing the week up 2.5% to just under $90 a barrel. The 10-year yield settled at 4.668% after touching 4.7% after Thursday for the first time this year.3
2. Microsoft Earnings Jump on AI Demand
Microsoft’s profit rose last quarter as artificial intelligence bolstered demand for its software and cloud services, prompting the company to spend billions on infrastructure needed to accommodate the booming appetite for hot technology. The tech giant’s revenue increased 17% from a year earlier to $61.9 billion, beating analysts’ estimates. Its net income grew 20% to $21.9 billion.
Microsoft has been among the bigger winners in the AI race thanks to its close relationship with ChatGPT maker OpenAI. The company has woven the startup’s technology into an array of products called Copilot, which are AI assistants that plug into key offerings like its workplace software suite, Microsoft 365. Artificial intelligence is also boosting demand for its cloud services. Microsoft’s Azure cloud services rose 31% during the quarter. Microsoft said that 7 percentage points of the Azure growth came from its AI services, up from 6 percentage points the previous quarter. Microsoft is hoping that Copilot will become a major contributor of new revenue to its software business. Some analysts believe it could end up adding billions to the company’s top line. Microsoft shares rose 5% in after-hours trading Thursday.1
3. Alphabet Soars Most Since 2015 on Strong Earnings
Alphabet shares shot up 10% on Friday after the company posted better-than-expected first-quarter results and greenlit its first-ever dividend and a $70 billion buyback. It’s the sharpest rally for the stock since a 16% jump in July 2015. The company on Thursday reported revenue of $80.54 billion, a 15% increase from a year earlier and the fastest growth rate since early 2022, surpassing the $78.59 billion in sales expected by analysts polled by LSEG. Earnings of $1.89 per share eclipsed the $1.51 in earnings per share expected by Wall Street.
Alphabet announced that its board authorized a dividend of 20 cents per share to be paid on June 17th to all shareholders of record as of June 10th, and said it intends to pay future quarterly cash dividends. The company said the board also approved the repurchase of an additional $70 billion in stock. The company exceeded analysts’ expectations for YouTube advertising revenue and Google Cloud revenue. Barclays analysts maintained an overweight rating on Alphabet stock and lifted their price target to $200 from $173, lauding the company’s balancing of investment with efficiency and capital returns.3
4. Merck Beats Earnings Expectations
Merck on Thursday reported first-quarter revenue and adjusted earnings that topped expectations as it posted strong sales of its blockbuster cancer drug Keytruda and vaccine products. The pharmaceutical giant also raised and narrowed its full-year revenue and adjusted earnings forecasts. Merck now expects 2024 sales to come in between $63.1 billion and $64.3 billion, up from previous guidance of $62.7 to $64.2 billion. The company expects full year adjusted earnings of $8.53 to $8.65 per share, up from its prior forecast of $8.44 to $8.59 per share.
That outlook includes a one-time charge of roughly 26 cents per share related to Merck’s acquisition of Harpoon Therapeutics in January. The company develops immune-based cancer drugs. The guidance also includes a negative impact of 30 cents per share from foreign exchange changes. Shares of Merck rose 4% on Thursday following the results.
Here is what Merck reported for the first quarter compared with what Wall Street was expecting, based on a survey of analysts by LSEG:
Earnings per share: $2.07 adjusted vs. $1.88 expected.
Revenue: $15.78 billion vs. $15.20 billion expected
The company posted a net income of $4.76 billion, or $1.87 per share, for the first quarter. That compares with a net income of $2.82 billion, or $1.11 per share, during the year-earlier period.3
5. Ford Beats Sales Estimates on Strong Demand for Work Trucks
Ford Motor Co., rapidly retooling its electric vehicle strategy in a decelerating market for plug-ins, posted first-quarter results that beat expectations on strong sales of work trucks. The automaker Wednesday reported adjusted earnings per share of 49 cents, topping the 42 cents analysts expected on average. Revenue in the period of $42.8 billion surpassed the $40 billion analysts expected. Ford’s results were driven by a 36% jump in revenue and fatter profit margins at its commercial Ford Pro unit, lifted by strong sales of the recently redesigned Super Duty pickup truck.
As EV sales growth has stalled, Chief Executive Officer Jim Farley has dialed back an aggressive electrification push to make more SUVs and pickups that generate the profits needed to fund future growth. Ford’s Model e electric-car division posted another loss in the quarter. The CEO has delayed two battery-powered models and slashed EV prices and production while ramping up output of gas-fueled models like the Bronco sport-utility vehicle as well as gas-electric hybrids such as the Maverick tiny truck. The automaker is also pivoting to produce smaller, more-affordable EVs due to arrive in late 2026, Bloomberg has reported. Lawler told reporters on Wednesday that those new products would be profitable from the time that they go on sale. Ford reiterated its earnings forecast for the year of $10 billion to $12 billion before interest and taxes, and said it is trending toward the high end of that range. The company also raised its free cash flow forecast to between $6.5 billion to $7.5 billion. 2
Sources:
(1) www.wsj.com
(2) www.bloomberg.com
(3) www.cnbc.com
(4) news.microsoft.com
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