Don’t react too hastily…

Thoughts of the Day

When the US Producer Price Index data was released yesterday, the market pounced on the higher-than-expected headline prints (+0.5% month-on-month vs +0.3% expected) and sold stocks and bonds, pushing S&P500 more than 0.5% lower and the US 2-year bond yield higher from 4.85% to 4.90%.

However, when investors realised that the previous month’s data was revised significantly lower – March’s +0.2% MoM was revised to a fall of -0.1% in prices – the market quickly reversed.

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Day Ahead

US Consumer Price Index (headline: +3.4% YoY expected and +3.5% prev, +0.3% MoM expected and +0.4% prev; core: +3.6% YoY expected and +3.8% prev, +0.3% MoM expected and +0.4% prev)

US Retail Sales (+0.4% MoM expected vs +0.7% prev)

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What Happened Yesterday

Market Movements as of New York Close 14 May 24

Schmid (2025 voter, known hawk):
“Inflation is still too high, Fed has more work to do. Interest rates could remain high for some time.”
Powell’s (Chair, slight hawk) speech at the Netherlands’ Foreign Bankers’ Association (more in headline 1): “I don’t think that it’s likely, based on the data that we have, that the next move that we make would be a rate hike.” “I think it’s more likely that we’ll be at a place where we hold the policy rate where it is.”

(Schmid is reiterating his view that inflation remains high.)

US Producer Price Index – The headline data was at first glance disappointing as the Month-on-Month changes were higher than expected. +2.2% YoY as expected (+1.8% prev) , but was +0.5% actual MoM (vs +0.3% expected and -0.1% prev). Core PPI was +2.4% YoY as expected (vs +2.1% prev) while +0.5% MoM (vs +0.2% MoM expected and -0.1% prev). Revisions for March: headline YoY was revised lower to +1.8% from +2.1%, and the core index was revised to +2.1% YoY from +2.4%, Both headline and core MoM changes were revised to -0.1% from +0.2% The revisions showed that the previous month’s PPI was significantly lower than initially thought. 

The S&P 500 futures sold off (-0.60% fall to 5,216 from 5,248, Nasdaq futures -0.74% from 18,301 to 18,165) following the release of the higher than expected monthly PPI print  but bounced quickly back to where it was when the market realised that the prints for the previous month were revised significantly lower. The US 10-year yield rose +0.04% from 4.49% to 4.53% in immediate reaction to the PPI figures but fell back quickly to 4.49% because of the revisions, and ended down -0.05% on the day..

The US stock market opened almost unchanged from Monday. It then traded higher in the opening hour following Fed Chair Powell’s assurance that it is unlikely to have any more rate hikes (see headline 1). The S&P 500 finished +0.48% higher on the day (high: +0.55%, low: -0.07%), the Dow Jones increased +0.32% (high: +0.47%, low: -0.15%) while the Nasdaq jumped +0.68% (high: +0.77%, low: -0.13%).

GameStop (NYSE: GME) rose another +59.84% yesterday after rising +74% on Monday in reaction to the return of Roaring Kitty, tweeting again after an absence of 3 years, on Twitter. AMC Entertainment (NYSE: AMC) rose +30.98% on the day yesterday despite completing a sale of 72.5 million shares in an equity offering that it launched in March, raising about $250 million of new equity capital. Intraday highs – GME: 64.83 (+112.91%), AMC: 11.88 (+128.90%)

The crypto market experienced some weakness despite the rise in US stocks. BTC and ETH both fell around 2% on the day. 
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Headlines & Market Impact

Fed Chair Powell says inflation has been higher than thought, expects rates to hold steady

Notable Snippet: Federal Reserve Chair Jerome Powell reiterated Tuesday that inflation is falling more slowly than expected and will keep the central bank on hold for an extended period.

Speaking to the annual general meeting of the Foreign Bankers’ Association in Amsterdam, the central bank leader noted that the rapid disinflation that happened in 2023 has slowed considerably this year and caused a rethink of where policy is headed.

“We did not expect this to be a smooth road. But these [inflation readings] were higher than I think anybody expected,” Powell said. “What that has told us is that we’ll need to be patient and let restrictive policy do its work.”

While he expects inflation to come down through the year, he noted that hasn’t happened so far.

“I do think it’s really a question of keeping policy at the current rate for longer than had been thought,” he said.

However, Powell also repeated that he does not expect the Fed to be raising rates.

The Fed has been holding its key overnight borrowing rate in a targeted range of 5.25%-5.5%. Though the rate has been there since July, it is the highest level in some 23 years.

“I don’t think that it’s likely, based on the data that we have, that the next move that we make would be a rate hike,” he said. “I think it’s more likely that we’ll be at a place where we hold the policy rate where it is.”

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Google rolls out its most powerful AI models as competition from OpenAI heats up

Notable Snippet: Google used its annual developer conference to showcase what the company is calling its lightest and most efficient artificial intelligence models.

At Google I/O on Tuesday, the company announced Gemini 1.5 Flash, the newest addition to the Gemini series. Google said in a blog post that the new model can quickly summarise conversations, caption images and videos and extract data from large documents and tables.

“We heard from developers that they wanted something faster and even more cost-effective,” said Demis Hassabis, CEO of Google DeepMind, in a press briefing.

The unveiling comes as tech companies increasingly refocus their product development and rollouts around generative AI, which is of particular importance to Google because the new tools give consumers more advanced and creative ways to access online information compared with traditional web search.

Google recently announced an improved Gemini 1.5 Pro model, which can make sense of multiple large documents — 1,500 pages total — or summarise 100 emails, according to a vice president working on Gemini.

Gemini 1.5 Pro will soon be able to handle an hour of video content, or codebases with more than 30,000 lines, said Sissie Hsiao, a vice president at Google and the general manager for Gemini experiences.

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Alibaba shares fall 6% after the Chinese tech giant posts 86% drop in profit

Notable Snippet: Shares of Alibaba fell sharply on Tuesday after the Chinese tech giant’s net profit plunged in the fiscal fourth quarter.

Here’s how Alibaba did in the March quarter versus LSEG consensus estimates:

Revenue: 221.9 billion yuan ($30.7 billion) versus 219.66 billion yuan expected.

Net income attributable to ordinary shareholders came in at 3.3 billion yuan, down 86% year on year.

In a bid to signal confidence to shareholders, the Chinese tech giant said earlier this year that it increased its share buyback program by $25 billion through the end of March 2027.

Revenue for the Taobao and Tmall division, which houses Alibaba’s China e-commerce business, rose 4% year on year to 93.2 billion yuan. That was faster than the 2% growth in the previous quarter.

Customer management revenue — which is sales received from services such as marketing that Alibaba sells to merchants on its Taobao and Tmall e-commerce platforms — rose 5% year on year, after coming in flat in the previous quarter. Alibaba’s international commerce business also logged a revenue increase of 45% year on year to 27.4 billion yuan.

The profit drop casts a long shadow on the earnings. Alibaba said the reason for the fall is “primarily attributable to a net loss from our investments in publicly-traded companies during the quarter, compared to a net gain in the same quarter last year, due to the mark-to-market changes.”

The Chinese giant said it is in the process of reducing “low-margin project-based” contracts in its cloud division and expects artificial intelligence-related products and public cloud, which relates to enterprise customers, to “offset the impact of the roll-off of project-based revenues.”

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Stock Indices

Phan Vee Leung
CIO & Founder, TrackRecord