Amid macro skepticism , Alphabet and Microsoft shone through

Market

Amid a challenging backdrop marked by a concerning data mix, including significantly lower-than-anticipated Q1 GDP figures alongside unexpectedly heightened price pressures, the S&P 500 staged a remarkable rebound in after-hours trading. This turnaround was propelled by a swift narrative shift catalyzed by strong earnings performances from Alphabet and Microsoft. The tech giants' stocks surged, injecting a significant dose of optimism into investor sentiment. This positive momentum provided a much-needed boost after Meta's cautious forecast failed to inspire confidence in discerning ears.

Tension was taut following a rough day for Meta, which unnerved investors with its cost outlook and capex plan, both of which underscored just how expensive building the future is likely to be.

Beyond the AI hype, a slew of stocks tumbled after GDP expanded at a meagre 1.6%, compounded by a hotter-than-expected read on PCE deflator, the Fed's preferred inflation measure.

The spectre of stagflation may be creeping back into discussions, although it might be premature to evoke that old nasty, but one thing that seems sure is the likelihood of rate cuts this year continues to dwindle.

It’s all about the alarming "supercore" measure, which the Fed uses as a benchmark for gauging disinflation progress. This measure, encompassing core services excluding housing, surged to over 5% last quarter.

For policymakers, the implications are clear: rate cuts are unlikely to be considered until there's a notable shift in these inflationary dynamics.

The market sentiment reflects this nuance. Expectations for Fed cuts in 2024 have diminished significantly, now hovering around just ~34 basis points — equating to one quarter-point cut with less than even odds of a second. This starkly contrasts the sentiment in January when such cuts were priced in at nearly 175 basis points.

Despite prevailing macroeconomic unease, Alphabet and Microsoft's earnings reports shone through. Alphabet, for instance, experienced its most robust top-line growth in two years, announcing its inaugural dividend alongside a $70 billion stock buyback. This news exceeded the expectations of even the most discerning ears and drove the stock up nearly 16% after the bell.

Bank of Japan day

The global macroeconomic landscape poses challenges for Japanese officials as they attempt to halt further yen weakening. This week has seen positive indicators suggesting a pickup in global growth at the beginning of the year, particularly evident in encouraging European business confidence surveys. These developments contribute to the ongoing upward adjustment in yields worldwide outside of Japan; hence, the yen is getting sold amongst many G-10 currencies, adding to yesterday’s USDJPY “meltup. “

Given the Bank of Japan has balked at intervening at crucial 152 or 155 USDJPY levels, it seems like a reasonable assumption that policy markets would prefer to see a significant decline in US yields before considering intervention to address the overbought and arguably undervalued yen.

Unless the BoJ throws caution to the wind and yanks a rate hike rabbit out of the hat tomorrow or pulls the trigger on intervention, this could be a painfully expensive experience for reversion traders running against the market's bullish skew on USDJPY.

Oil market

Oil traders quickly shook off the bears stemming from disappointing GDP and PCE deflator figures; oil prices maintained their resilience as energy traders remained vigilant about potential escalations in the Middle East. However, with inventories on the risk, a somewhat bearish sentiment is resurfacing in the market. Yet, the looming weekend gap risk in the event of another flare-up in the Middle East may provide enough incentive for any dips to be covered.