How will the year turn out?

Thoughts of the Day

When we started the year, the market was expecting at least 6 interest rate cuts of 0.25% from the US Federal Reserve and for them to start cutting in the March meeting. However, we’re now in May, and no cuts are in sight, and the market expects less than 2 cuts of 0.25% by the end of the year. What happened?

As they’ve been telling us all along, the Fed officials were going to make their decisions based on the data that they see. Data, especially on the inflation front, hasn’t been that great for the rate cut proponents. Inflation is taking a far longer to come down and remains sticky and close to 3% than the 2% target. 

From the recent comments we hear from the Fed officials, they remain undecided about the future path of interest rates. Their decisions remain highly dependent on how the data evolves. The one significant change is that they now are more concerned about the jobs market than before. 

So how the year will turn out will depend on how the data evolves, and the jobs market has been more resilient than many expected until recently. If the job market continues to weaken more than expected, the narrative from the Fed will change very quickly.

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Day Ahead

Bank of England Monetary Policy Meeting (expect interest rates to be kept unchanged at 5.25%) 

Earnings: Fiverr (FVRR), Akamai Technologies (AKAM)

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What Happened Yesterday

Market Movements as of New York Close 8 May 24

Fedspeak:
Collins (2025 voter, slight hawk):
“There are risks to cutting rates too soon. Fed policy well positioned for current outlook. Monetary policy is ‘moderately’ restrictive.”
(Collins is probably becoming less dovish and more neutral as the outlook remains uncertain – compared to the possibility of 2 rate cuts she mentioned previously. )

The US stock market opened lower from Tuesday possibly due to more news of trade restrictions on the semiconductor front (article 2). It then traded higher in the opening hour and attempted to negate the opening losses. The S&P 500 finished unchanged on the day (high: +0.08%, low: -0.42%), the Dow Jones rose +0.44% (high: +0.54%, low: -0.18%) while the Nasdaq edged -0.04% lower (high: +0.24%, low: -0.57%).

[Earnings] Uber Technologies (NASDAQ: UBER , -5.72% Wednesday New York session) fell as it posted an unexpected net loss of -32 cents vs a gain of 23 cents expected. Revenue: $10.13 billion vs $10.11 billion expected.

Arm Holdings (NASDAQ: ARM, -8.99% in extended trading despite a beat on earnings) fell as it provided a poor full-year revenue forecast of between $3.8 billion and $4.1 billion, with a midpoint of $3.95 billion compared to expectations of $3.99 billion. Earnings: 36 cents vs 30 cents expected, Revenue: $928 million vs $875.6 million expected.

The crypto market traded lower possibly due to news that Greyscale chose to withdraw its Ether futures ETF application just 3 weeks before the US Securities and Exchange Commission were set to decide on it.
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Headlines & Market Impact

BOJ board turned hawkish in April, many saw need for more rate hikes-summary

Notable Snippet: Bank of Japan board members turned overwhelmingly hawkish at their April policy meeting with many calling for the need to raise interest rates steadily to forestall risks of an inflation overshoot, a summary of opinions at the meeting showed.

Some members saw the chance of a faster-than-expected pace of interest rate hikes on heightening prospects of inflation durably staying, or even exceeding, the BOJ’s 2% target, the summary showed on Thursday.

“If underlying inflation continues to deviate upward from the baseline scenario against the backdrop of a weaker yen, it is quite possible that the pace of monetary policy normalisation will accelerate,” one member was quoted as saying.

Many of the opinions shown in the summary called for the need to raise interest rates steadily, and consider reducing the size of the BOJ’s bond purchases sometime in the future.

One member said the BOJ should consider raising rates moderately to avoid being forced to hike in a “discontinuous and rapid” way once its price target is sustainably met.

Another said the BOJ must raise interest rates in a “timely and appropriate manner,” as the likelihood of achieving its growth and price projections heightens, the summary showed.

“If the outlook shown in our April quarterly report is realised, our 2% inflation target will be sustainably and stably achieved in about two years and the output gap will be positive. Therefore, there’s a chance our policy interest rate will be higher than the path currently priced in by the market,” another opinion showed.

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Intel, Qualcomm say exports to China blocked as Beijing objects

Notable Snippet: Intel (INTC.O) said on Wednesday its sales would take a hit after the U.S. revoked some of the chipmaker’s export licences for a customer in China, in a move Beijing complained was going too far in the name of national security.

Intel did not disclose the name of the Chinese customer that had licences cancelled in its filing, with the Securities and Exchange Commission, but Reuters had reported on Tuesday the U.S. has revoked licences that allowed companies, including Intel and Qualcomm (QCOM.O) to ship chips used for laptops and handsets to sanctioned Chinese telecoms equipment maker Huawei Technologies.

Intel’s shares were down 2.9% at $29.80 on Wednesday afternoon after the company said it expects revenue for the second quarter to remain in the range of $12.5 billion to $13.5 billion, but below the midpoint. Intel shares have lost nearly 38% so far this year.

Qualcomm also said on Wednesday that one of its export licences for Huawei had been revoked; its shares were flat.

“Huawei is a threat,” Commerce Secretary Gina Raimondo told Reuters after a congressional hearing on Wednesday, adding that the move was not a change in policy.

“Maybe we have an increased focus on AI. And so when we learn more about AI capabilities, that’s when we have to take action,” she said. “So if a chip that we previously licensed for example, now we discover had AI capabilities, we’re going to revoke the licence.”

The Chinese foreign ministry, which has criticised every effort by the U.S. to crack down on tech exports to China, said in a statement it opposed the move and that the U.S. was “over-stretching the concept of national security and abusing export controls to suppress Chinese companies without justification.”

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Google DeepMind unveils next generation of drug discovery AI model

Notable Snippet: Google Deepmind has unveiled the third major version of its “AlphaFold” artificial intelligence model, designed to help scientists design drugs and target disease more effectively.

In 2020, the company made a significant advance in molecular biology by using AI to successfully predict the behaviour of microscopic proteins.

With the latest incarnation of AlphaFold, researchers at DeepMind and sister company Isomorphic Labs – both overseen by cofounder Demis Hassabis – have mapped the behaviour for all of life’s molecules, including human DNA.

The interactions of proteins – from enzymes crucial to the human metabolism, to the antibodies that fight infectious diseases – with other molecules is key to drug discovery and development.

DeepMind said the findings, published in research journal Nature on Wednesday, would reduce the time and money needed to develop potentially life-changing treatments.

“With these new capabilities, we can design a molecule that will bind to a specific place on a protein, and we can predict how strongly it will bind,” Hassabis said in a press briefing on Tuesday.

“It’s a critical step if you want to design drugs and compounds that will help with disease.”

The company also announced the release of the “AlphaFold server”, a free online tool that scientists can use to test their hypotheses before running real-world tests.

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Phan Vee Leung
CIO & Founder, TrackRecord