Is AI a Bubble?

Thoughts of the Day

As we have saying for the past year now, it’s not a bubble when the world continues to underestimate the sweeping changes that AI will bring into our lives.

Recent developments, such as Microsoft using AI to expedite scientific discoveries, hint at groundbreaking advancements in life extension and energy storage. Brace yourself for mind-blowing innovations in the weeks ahead.

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Day Ahead

UK CPI is expected to show that prices rose +3.8% in December, compared to +3.9% in November.

The Euro area inflation rate is expected to spike to +2.9% in December from +2.4% in November.

US Retail Sales is expected to rise +0.4% Month-on-Month in December from +0.3% in November.

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What Happened Yesterday

Market Movements as of New York Close 16 Jan 24
  • Fedspeak:
    Waller (current voter, known centrist): “In many previous cycles … the FOMC cut rates reactively and did so quickly and often by large amounts. This cycle, however, … I see no reason to move as quickly or cut as rapidly as in the past.”
    (While Waller sounded pretty dovish previously, his comments this time are on the hawkish side.)
  • Chinese Economic data: China resumed the reporting of youth unemployment aged 16 to 24 at 14.9% (previously above 20%). General unemployment rate in cities in December was 5.1%. Q4 GDP Growth Rate was at +1% QoQ as expected, down from +1.3% previously. Retail sales increased +7.4% YoY (vs +8% expected) in December, down from +10.1% in November. Industrial production rose by +6.8% YoY (vs +6.6% expected and prev) in December. Fixed asset investment rose by +3% YoY (vs +2.9% expected and prev). The Chinese economy seems to be improving and we expect it to continue this year.
  • The US Treasury Yield curve inversion narrowed to 0.15% as the US 2-year bond yield rose +0.08% to 4.22% while the 10-year yield spiked +0.11% to 4.07%. The move is likely due to Waller’s comments as the market reduces its expectations for aggressive interest rate cuts.
  • The US stock futures traded lower through the Asian and London trading sessions after the MLK Jr trading holiday as the US 10-year bond yields rose to 4.00% in early Asian hours. The S&P 500 futures fell to a low of 4785.25 (-0.54%) from 4811.5 at open but managed to recover to 4793.75 (-0.37%) due to strong earnings from some US banks premarket.
  • The US stock market opened slightly from Friday. It then started to trade lower as the New York session progressed due to a lacklustre outlook (Apple offering unexpected massive discounts in China and Wells Fargo downgrade of Boeing due to the troubles with its 737 Max9  model) on Apple (-1.23%) and Boeing (-7.89%). Fed Waller’s hawkish comments weighed down on risk sentiment as well. Thus, the S&P 500 fell -0.37% on the day (high: -0.03%, low: -0.77%), the Dow Jones dipped -0.62% (high: -0.13%, low: -1.04%) while the Nasdaq inched lower by -0.01% (high: +0.37%, low: -0.63%) as it was supported by outperformance in AMD (+8.31%) and Nvidia (+3.06%) as the demand for AI chips remains extremely strong.
  • The crypto market traded higher despite a stronger USD and a weaker stock market. Expect crypto to grind higher as the BTC ETFs continue to gain traction.
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Headlines & Market Impact

China’s economic growth is set to slow in 2024. Here’s what Wall Street is predicting

Notable Snippet: Major international investment banks expect China’s economy to grow at a slower pace in 2024 than in 2023, according to annual forecasts released in the last few months.

The average prediction among five firms, including Goldman Sachs and Morgan Stanley, pointed to a 4.6% increase in real GDP this year, down from 5.2% expected for 2023.

The world’s second-largest economy has slowed from the double-digit growth of past decades, weighed down during the pandemic by Covid-19 restrictions and, more recently, a slump in the real estate market.

Despite significant growth in sectors such as tourism and electric cars, China’s economy last year did not rebound from the pandemic as quickly as many banks had initially expected.

“The Chinese economy did not follow the script in 2023,” Goldman Sachs analysts said in their 2024 outlook in November.

The International Monetary Fund in November also cited China’s policy announcements as a reason for its decision to raise the 2023 growth forecast to 5.4%, from 5% previously.

However, the IMF said it still expected China’s growth to slow in 2024 to 4.6% “amid continuing weakness in the property market and subdued external demand.”

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Tech layoffs continue after ‘Year of Efficiency’

Notable Snippet: Big Tech’s “Year of Efficiency” may be over but recent layoffs at Google and Amazon have signalled the firms will keep cutting jobs in 2024 as they make big investments in generative AI.

Analysts and industry experts believe the layoffs would be smaller and more targeted this year, with firms that are racing to catch up in the AI race more likely to make such moves to offset the billions of dollars they are spending on the tech.

Alphabet (GOOGL.O), suggested that last week, saying it plans to invest in its “biggest priorities” as the Google parent laid off around a thousand employees across multiple divisions, including in its voice assistant unit and team responsible for Pixel and Fitbit.

Amazon.com (AMZN.O), laid off several hundred employees in its streaming and studio operations last week. Hundreds of jobs were also cut in its Twitch live-streaming platform and Audible audiobook unit, according to media reports.

Overall, tech firms have let go more than 7,500 employees so far in January, according to tracking website Layoffs.fyi.

“No company wants to get left behind by the AI revolution and they are all making sure they have these capabilities and are prioritising them, even when it is at the expense of other initiatives,” D.A. Davidson & Co analyst Gil Luria said.

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Canada’s December inflation dashes hopes of early rate cut

Notable Snippet: Canada’s annual inflation rate rose as expected in December, data showed on Tuesday, and underlying price pressures remained, dashing hopes that the central bank would shift into rate-cut mode early this year.

Annual inflation rose to 3.4% in December from 3.1% in November, Statistics Canada said, matching estimates by economists polled by Reuters. On a monthly basis, consumer prices matched expectations as well and fell 0.3% from November.

Two of the Bank of Canada’s (BoC’s) core measures of underlying inflation, CPI-trim and CPI-median, accelerated, with the three-month annualised rate of the two rising to 3.6% from an upwardly revised 2.9% in the prior month, according to Royce Mendes, head of macro strategy for Desjardins Group.

“The stickiness in these core measures of inflation comes as a disappointment to Canadians hoping to see enough progress today to open the door to rate cuts,” Mendes said.

Headline inflation has exceeded the BoC’s 1-3% target range since March 2021.

The annual inflation rate was largely driven by higher gasoline prices compared with the same period a year ago, Statscan said. Airfares, fuel oil, passenger vehicles and rent also accelerated. Food purchases from stores rose 4.7% on the year, the same as the previous month.

The acceleration of core inflation “speaks to the fact that the Bank of Canada still has some progress that they need to see in order to consider lowering interest rates,” said Andrew Kelvin, chief Canada strategist at TD Securities.

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord