AI saves the day

Facebook’s Meta went on a 10% freefall yesterday, even after the company announced better-than-expected earnings. This being said, yesterday’s selloff ended up being less than suggested in the afterhours trading. CEO Mark Zuckerberg said that, in the past, the company also experienced high price volatility during a period of investment when the results were not yet visible. Meta could successfully turn its AI investments into profit – it’s just that it will take a bit longer than expected. All in all, some investors think that Meta is worth buying at the dip. The question is, where’s the dip?

One positive news is that Meta didn’t pull the rest of the tech stocks down with it yesterday. Nvidia gained more than 3% while Tesla jumped another 5% - don’t ask me why.

On the macroeconomic stage, the news were not bright. The first estimate for the US Q1 growth showed that the US economy slowed way more than expected in Q1. A soft print could’ve at least revived the dovish Federal Reserve (Fed) expectations, but the notable jump in core PCE prices to 3.7%, from 2% printed a quarter earlier, didn’t give much room for optimism. Yesterday's data threw a wrench into the soft-landing dream and sparked fears of stagflation, where the economy slows down while inflation persists – which would force the Fed to keep its policy tight. The US 2-year yield continues to test the 5% mark to the upside, as the 10-year paper yields near 4.70%.

Today, all eyes are on the US core PCE print for March, expected to decline to 2.6% from 2.8% printed a month earlier. The fear is to see a higher inflation print, of course, which would further batter the Fed cut expectations. But the ‘good’ news is, it looked like yesterday’s price action already embedded today’s core PCE print. Therefore, bad news are – at least – partially priced in.

Diving a bit deeper into yesterday’s GDP print: The slowdown was mainly caused by a lower inventory accumulation and a wider trade gap. But a gauge of underlying demand still came in above 3% for the third straight quarter. The latter explains why we see inflation persists as the headline GDP slows down. In conclusion, inflation which slowed last year thanks to fading post-pandemic boost is now fueled by still-robust demand. And that’s something the Fed could address … by keeping its policy tight. Swap traders now price in 35bp cut for the entire 2024, down from six rate cuts priced in at the start of the year.

AI buzz continues

Microsoft and Google’s Alphabet both jumped in the afterhours trading after announcing sufficiently strong results that met and surpassed expectations. Microsoft gained more than 4%  on better-than-expected sales and profit thanks to robust corporate demand for its cloud and AI offerings, while Google jumped 11% boosted by its own cloud business. Nasdaq futures are up by more than 1% this morning.

The Yen selloff continues

The US dollar index is slightly better bid this morning, as the USDJPY shot above the 156 level after the Bank of Japan (BoJ) decided to leave its rates unchanged. The decision was expected, the BoJ even lifted its 2024 inflation forecast from 2.4% to 2.8%, but in vain. The absence of a clear hawkish message and the lack of intervention news strengthened appetite for a further rise to 160.

Elsewhere, the euro and sterling retreat this morning against the US dollar following this week’s rebound. US crude recovers past the $84pb level despite the US GDP disappointment and the further decline in Fed rate cut expectations. The geopolitical risks remain tilted to the upside as Israel is said to be preparing for an all-out war with Iran-backed Hezbollah.

On the corporate front, Exxon and Chevron are expected to announce their Q1 results today. Despite rising crude oil prices, both companies are expected to report a decline in Q1 profits compared to the same period last year due to a global glut in nat gas supplies and narrower refining margins. If all goes well and crude prices continue to climb, the energy giants’ fortunes could reverse in the Q2. Exxon closed yesterday’s session above $121 per share, as Chevron climbed past $165 per barrel. While the reflation trade is expected to boost appetite for energy companies, the unwelcomed return of inflation may put the reflation trade on hold.