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The cut is certain – The outlook isn’t

Last week was full of uncertainties and mixed signals, but US indices ultimately ended in the green after the PCE report — the Fed’s preferred inflation gauge — confirmed that inflation remains elevated, near 3%, well above the 2% target, but broadly stable. Core PCE even eased slightly to 2.8% from 2.9%. More importantly for sentiment, both the 1-year and 5-year Michigan inflation expectations fell. December’s survey showed a modest improvement in consumer sentiment — likely helped by the holiday season — but current conditions deteriorated. The softening in recent economic data explains why inflation expectations are easing: the weaker the labour market, the more cautious households become, and the slower price pressures build. That’s not good news for Main Street — but it is good news for Wall Street, where investors are eager for rate cuts as long as corporate earnings hold up.

The good news for them is that a 25bp Fed cut on Wednesday is essentially locked in. The recent weakness in employment data and a stable, up-to-date PCE print support that decision.

But what happens next is the part no one agrees on. The FOMC is divided. Some members worry that tariff-driven inflation could offset disinflationary forces and argue for caution — versus those pushing for quicker cuts, in line with political pressures and public preference. The base case is that politics will dominate and that rates will continue to move lower as the committee rotates toward members more aligned with the incoming administration’s views, starting with a new Federal Reserve (Fed) Chair.

But here is the risk: if the Fed delivers politically driven cuts without economic justification, markets could push back and long-term yields could rise.

Elsewhere, the Reserve Bank of Australia (RBA), the Bank of Canada (BoC) and the Swiss National Bank (SNB) are all expected to keep rates unchanged. In Japan, today’s weak GDP print raised some doubts among Bank of Japan (BoJ) hawks, but 10-year yield continues to climb — now around 1.96% — as wage growth accelerates and keeps inflation concerns alive. The BoJ still looks likely to hike next week.

Meanwhile, tensions between China and Japan are rising, boosting Japanese defence stocks, with Mitsubishi and Kawasaki Heavy Industries each up between 2-3% this morning. Chinese equities, by contrast, are gaining on strong trade data showing a robust jump in exports last month as firms rushed to move inventory ahead of the latest tariff truce with the US.

Oil is also firmer: WTI broke above its 50-day moving average last Friday and closed the week above it, suggesting that further upside is possible, supported by a softer US dollar — which, in theory, should help EM demand — and ongoing AI-related energy needs.

AI earnings: two major AI-linked names report earnings this week. Let’s start with the simpler one: Broadcom, reporting Thursday. Expectations are constructive. Broadcom continues to benefit from Google’s accelerating deployment of TPUs — for internal use and for Google Cloud customers. Broadcom is one of Google’s key partners in producing these chips, handling physical design and components for the latest TPU generations. Rising TPU demand therefore translates into meaningful revenue for Broadcom. The company also recently expanded its client base, including chip supply for Meta. Altogether, the stock remains — for now — relatively resilient to the broader AI-sector volatility.

Oracle, however, is more complicated. The company is now treated as a bellwether of AI-related balance-sheet RISK: it has taken on significant debt to fund its AI and cloud expansion, and carries a lower credit rating than its Big Tech peers. Its 5-year CDS widened sharply last week to a 16-month high.

Analysts expect Oracle to report roughly $16.2bn in revenue and $1.63 EPS. Those figures look solid at first glance but current estimates imply about 9–10% revenue growth and 11–12% EPS growth versus last year. That signals that Wall Street is no longer expecting blowout numbers, but rather a steadier, more incremental climb as Oracle converts its large AI-cloud backlog into realised revenue. Expectations are low — the good news. The bad news is that investors will scrutinise margins and capital efficiency.

Oracle’s massive cloud and AI build-out has required equally massive spending. Capex has surged as the company races to expand data-centre capacity, putting pressure on margins just as scrutiny intensifies. At the same time, Oracle’s elevated debt load remains one of the largest in Big Tech, and the recent CDS widening shows that credit markets are increasingly sensitive to how much leverage is being used to finance its AI push.

The concern is straightforward: if cloud-backlog conversion slows or margins disappoint, heavy spending combined with high debt could squeeze cash flow at the wrong time. The bull case requires very strong execution — because the balance sheet leaves relatively little room for error.

Author

Ipek Ozkardeskaya

Ipek Ozkardeskaya began her financial career in 2010 in the structured products desk of the Swiss Banque Cantonale Vaudoise. She worked in HSBC Private Bank in Geneva in relation to high and ultra-high-net-worth clients.

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