AI rally defies gravity, focus on EZ CPI, US jobs data

Early year worries that the AI rally would fizzle out were rapidly wiped out at the start of this week by Microsoft’s announcement to be willing to spend $80bn on data centers – which pushed the stock up to 1.4% yesterday, by Foxconn’s announcement of a 42% surge in its December sales thanks to AI-driven demand – which pushed Micron 10% higher in the US yesterday and Foxconn 3% higher in Taiwan today, and by news that Qualcomm is now introducing new chips that only cost $600 to power personal computers that are capable of running the latest AI software. Qualcomm gained 1.28% yesterday. And Nvidia – in all this – jumped 3.43% before Jensen Huang’s CES speech and hit a fresh record high yesterday. That doesn’t look like a rally that’s fizzling out just yet – although the AI discussions this year will shift from hype and hope to real-life applications and return on massive investments. Consequently, the data beyond the AI enablers (like chip and equipment makers) will likely command a larger share of investor attention in 2025. A concrete integration of AI to daily tools and increased revenues are essential.

For now though, the AI enablers continue to shoulder the rally. The S&P500 kicked off the week with a 0.55% gain, while its tech-heavy peer Nasdaq 100 gained more than 1%. Mood elsewhere was murkier however. The Dow Jones for example was slightly lower on Monday, as the 10-year yield spiked past 4.60% and the 30-year yield hit 4.86% - for the first time since November 2023 on expectation that the Federal Reserve (Fed) could make a long pause before its next rate cut due to worries of reviving inflation with Donald Trump’s pro-growth and tariff policies.

The US dollar couldn’t benefit from higher yields as Washington Post reported that Trump’s policies wouldn’t be as harsh as promised. But Trump rapidly denied the news and the dollar rebounded. The USDCAD sharply fell on Trudeau’s resignation – and probably on the back of a rally in US crude to $75pb. Note that US crude is now in the bullish consolidation zone and could extend gains toward its 200-DMA – that stands near $75.70pb level.

Coming back to FX, most major currencies spiked against a weaker US dollar yesterday. The EUR/USD – which tanked to 1.0224 in the early hours of the new year - rebounded past the 1.04 level, while Cable successfully threw itself back above the 1.25 mark.

Euro could extend rebound

The first day of 2025 marked the end of gas flows from Russia to Europe that flew through Ukraine. Winter temperatures are low and the European gas reserves are melting faster than average. And that’s pushing the nat gas prices higher. The European nat gas futures rallied up to 30% in the last two weeks of December. We are not close to the spike experienced at the beginning of the war but the outlook is positive, and price dips – like the one we saw yesterday – are interesting opportunities to strengthen long positions. The only thing that could reverse the gas rally right now is the hope that the expired contract will be renewed in the next few weeks, on hope that Trump will magically end the war in Ukraine, and/or weak demand from China – which, by the way, recorded its worst start to the year since 2016...

But coming back to Europe, the big problem with rising energy prices is that it starts to be reflected in inflation figures. Released yesterday, the German inflation spiked to 2.9% in December from 2.4% printed a month earlier, and the Eurozone’s aggregate CPI – due later this morning - will likely show a similar upside pressure, as well. And that’s not good news for the European Central Bank (ECB) that is supposed to give support to the weakened European economies by ample rate cuts this year. If inflation spikes, the ECB won’t be able to ease the financial conditions as much as desired. The latter reasoning is positive for the euro’s valuation, but negative for stock valuations. The Stoxx 600 rallied to its 200-DMA yesterday but a stronger-than-expected CPI number from the Eurozone this morning could spoil that optimism, while allowing the EURUSD to extend gains above the 1.04 mark and reclaim a rise toward the 1.05 psychological level.

Eyes on US jobs

The US will be releasing its latest jobs figures starting from today, and the numbers will matter fpr the Fed expectations. The US economic growth last year remained robust, the jobs market started cooling but the cool down was not as sharp as the Fed predicted; the US economy ended by adding close to 180K new nonfarm jobs on average every month during last year. As such, the potentially excessive Fed cuts of last year now fuel the expectation that the Fed will pause for a few months. Activity on Fed funds futures suggests that the next Fed cut will not arrive before May. A sufficiently soft figures this week could scale back a part of that hawkishness, pull the US dollar lower and allow the others to gain field.