Read on the Trading Floor - 25 April 2024
Today’s focus… Stagflation, Ccy Wars, AI costs and much more
Macro Themes At Play
Theme 1 - US drifting towards stagflation?
Theme 2 - CCY Wars
Theme 3 - The cost of AI
Further reading and listening of note
Theme 1 - US drifting towards stagflation?
Slower growth and higher price pressures. Is the US drifting towards stagflation?
GDP Adv Q1 QoQ: 1.6% vs exp 2.5% and prior 3.4%
Core PCE Prices QoQ: 3.7% vs exp 3.4% and prior 2%
Following on the heels of Meta's disappointing earnings, the stock market has not liked today's data set. Lower growth, higher capex on AI retooling as well as sticker inflation / prices pressures keeps the Fed's >20% chance of a hike on the table. 10s have sold off to 4.73%, 2s broken 5% whilst SPX and Nasdaq are firmly in the red (both currently down over 1.5% at thew time of writing). Maybe Jamie Dimon was on to something when he pushed back against the market pricing a high probability of a soft-landing.
The lower GDP print comes on the back of a surge in imports, which is a subtracting factor in the calculation of GDP (Calculated Risk: Real GDP increased at 1.6% Annualized Rate in Q1). Inventory depletion also weighed on the number. 1.6% disappoints the US exceptional theme as we drop towards a potential period of moderate growth.
However, the USD is stronger as yields sell off and today's data set adds to the anticipation for the Fed's favoured Core PCE Index print tomorrow. 0.4% or hotter (exp 0.3%) and "higher for longer" (despite weakening growth) will be the mantra as the inflation battle is most certainly not won. Biden/Powell will be hoping for an inline print! Furthermore, corp t+2 USD demand and AM rebalancing flows could also provide a tailwind for the greenback in month end.
Source: Tradingeconomics.com
Theme 2 - CCY Wars
Does the BoJ want a stronger JPY that will accelerate the deflationary trend? How will the PBOC respond to USDJPY drifting higher to 160.00? If US yields are wider, what can Asian authorities do? For global assets, one of the worst possible things that can occur in Q2 is US hitting a stagflationary patch, exporting tight momentary policy globally to those countries that are pegged to the USD. For now, it seems neither the BoJ or PBoC are ready to act. Watch this space as the market will test them, like USDJPY drifting to towards 156.00 ahead of tomorrow's BoJ meeting. Where is their pressure point????
LiveSquawk - BoJ Apr Preview
HSBC - Under the Banyan Tree - State of the Region: King dollar, interest rates and trade
Bloomberg - Yen Approaches Intervention Point as BOJ Meeting Starts
To delve deeper into the ccy war themes, its worth flagging James Rickards book (2011) Currency Wars: The Making of the Next Global Crisis... one from the archives!!!!
Theme 3 - The cost of AI
Zuckerberg is betting big on AI, the capex spend has disappointed investors in the short term as it impacts revenue and growth targets in the coming quarters. However, it will also be a new revenue stream for META once it is rolled out and monetized across their platforms of apps. Higher spending with disappointing revenue growth is one thing, but Zuckerberg's ROI on AI could be huge... should we be patient with Mark? We'll hear from Google and Microsoft after the close today. Their releases will be key for the AI theme to regain a steady footing.
Bloomberg - Zuckerberg Asks for Patience as Meta’s AI Push Spooks Investors
Bloomberg - Mark Zuckerberg Pivots to AI From Metaverse to Further His Legacy
NY Times - Wall Street’s Patience for a Costly A.I. Arms Race Is Waning
Elsewhere, AI + crypto + EV, there is a growing theme in Harkster (your research inbox) on the demand for commodities + electricity from these new technologies.
ZeroHedge - Silicon Valley Artificial Intelligence Is Running On Eastern Coal
Apollo Academy - Outlook for commodity prices
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Top Pieces
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Econostream - ECB's Schnabel: Unit Labour Costs and Services Inflation Still Concerning
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Compounding Quality - Just buy the haystack!
FT - China warns Antony Blinken US must choose between ‘co-operation or confrontation’
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