Will intervention work?

Thoughts of the Day

The Japan MoF has supposedly intervened in selling USD to bolster the weakening JPY since Monday and sold a total of $60b over 2 separate occasions ($62b over 3 separate occasions in 2022). Although their efforts mirror those in 2022, long-term success depends on fundamental shifts such as lower US yields and higher JPY yields.

Without any obvious intervention, the market slowly dropped to trade near the lows of the week (around 153). As such, it can be inferred that the short-term speculators are now heavily long USD and if the US jobs number should surprise to the downside (causing a drop in US bond yields), USDJPY is likely to trigger stops to the downside and possibly test below the 150 level.

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Day Ahead

Euro Area Unemployment Rate (6.5% expected and prev)

US Nonfarm Payrolls (+243K expected vs +303k prev),  US Unemployment Rate (3.8% expected and prev)

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What Happened Yesterday

Market Movements as of New York Close 2 May 24

The US 2-year bond yield fell -0.08% to 4.88% while the 10-year yield fell -0.04% to 4.59% resulting in the US Treasury Yield curve inversion narrowing to 0.29%. 
Interestingly, the USDJPY is trading at new weekly lows without any sign of BoJ/MoF intervention. This could be a sign that short-term speculators are not too heavily long USD. (see more below)

The US stock futures rose steadily through the Asian and London trading sessions with the S&P 500 futures up +0.52% when the New York session began

The US stock market opened higher from Wednesday. It then saw a sudden drop in the opening hour as US Unit Labour Costs came in higher than expected (+4.7% QoQ vs+3.3% expected and 0.0% prev). Risk sentiment then improved through the rest of the New York session with the US stock indices rising through the session. The S&P 500 finished +0.91% higher on the day (high: +1.09%, low: -0.15%), the Dow Jones rose +0.85% (high: +1.03%, low: -0.02%) while the Nasdaq increased +1.29% (high: +1.49%, low: -0.16%).

[Earnings] Apple (NASDAQ: AAPL, +6.03% in after market trading) rose as it announced a $110 billion share buyback despite a -10% fall in iPhone sales. Revenue: $90.75 billion vs $90.01 billion expected, Earnings: $1.53 vs $1.50 expected.

Cloudflare (NASDAQ: NET, -14.30% in after market trading) tumbled as it provided revenue guidance ($394 million) that merely met expectations. Revenue: $378.6 million vs $373.2 million expected, Earnings: 16 cents vs 13 cents expected.

The earnings result from Apple caused a spike in the S&P 500 futures (+0.32%) and Nasdaq futures (+0.68%) in the after-market trading hours. 

The crypto market was relatively stable yesterday, Bitcoin and Ether gained +1.15% and +0.62% respectively.
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Headlines & Market Impact

Apple’s falling iPhone sales don’t bother Wall Street so long as margins, buybacks are increasing

Notable Snippet: A 10% decline in iPhone sales sounds like a problem for Apple, considering the company counts on the devices for half its revenue.

But investors didn’t seem to mind on Thursday, when Apple revealed the year-over-year drop in its fiscal second-quarter earnings report. The stock rose more than 6% after the market closed, a rally that would be the steepest since November 2022 should it continue into regular trading on Friday.

Instead of glaring too much at iPhone revenue, Wall Street chose to focus on the positive. Apple’s gross margin expanded to 46.6%, continuing an upward trajectory that reflects the company’s growing services business, which brings with it stout profits.

But perhaps the biggest catalyst for the pop was Apple’s announcement that it had approved $110 billion of share buybacks, the most ever for a public company. For the past three years, Apple has approved $90 billion in annual repurchases.

The after-hours jump shows how much investors are valuing Apple’s massive cash flow and the company’s willingness to return more of it to shareholders. It’s a shift in the way Apple has been viewed by Wall Street over the years, away from a hits-driven gadgets business and toward a financial powerhouse.

“Our free cash flow generation has been very strong over the years, particularly the last few years,” Apple CFO Luca Maestri said on the earnings call.

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Weak US productivity could threaten Fed’s ‘soft landing’ hopes

Notable Snippet: Weaker U.S. productivity gains in the first quarter may challenge the Federal Reserve’s efforts to finish its inflation fight without a painful rise in unemployment, potentially stalling progress on prices absent a further economic slowdown.

A jump last year in how much workers produce helped the economy grow fast and hiring remained strong while inflation fell nonetheless. Data for the first three months of 2024, however, showed worker productivity rose at a 0.3% annual pace, compared to increases of more than 3% in the prior three quarters.

Unit labour costs, as a result, jumped 4.7%, the fastest in a year, as businesses spread higher wage and benefit payments across a comparatively small boost in what each person produced.

Analysts said the first-quarter results don’t on their own disrupt what has been a core reason for optimism that the U.S. was heading for a “soft landing” in which inflation would return to the Fed’s 2% target without the sort of sharp rise in joblessness associated with past battles against rising prices.

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BoC says there’s a limit to how far US and Canada rates can diverge

Notable Snippet: There is a limit to how far U.S. and Canadian interest rates can diverge but “certainly we’re not close to that limit”, Bank of Canada Governor Tiff Macklem told the House of Commons finance committee on Thursday.

Macklem reiterated that the central bank was waiting to see whether recent drops in underlying inflation would be sustained before starting to cut rates from a 23-year high of 5%.

Money markets see a more than 50% chance of a rate cut in June and have fully priced in a cut by September.

“We can run our own monetary policy so our interest rates in Canada don’t need to be the same as the U.S. rate or global rates,” Macklem said.

“But there is a limit to how far they can diverge. We’re certainly not close to that limit.”

Macklem reiterated that tighter monetary policy was having more of an impact in Canada than in the United States, given higher rates of household debt and the fact that most mortgages in Canada have to be renewed every five years.

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Stock Indices

Phan Vee Leung
CIO & Founder, TrackRecord