Yet another sign of economic weakness

Thoughts of the Day

The 1Q US GDP data (ACT +1.6%, EXP +2.5%, PREV +3.4%) marked the lowest growth since Q3 2022 and fell below +1.8% for the first time. The GDP Price Index QoQ Adv. Est. shows +3.1% (EXP +3%, PREV +1.7%), while Core PCE QoQ Adv. is at +3.7% (EXP +3.4%, PREV +2.0%). This indicates persistently higher inflation than expected. If the PCE data, to be released later today, surprises the downside, it will likely drive the stock market much higher.

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Day Ahead

US PCE Price Index (expected: +2.6% YoY in March, prev: +2.5% print in Feb)

University of Michigan Consumer Survey (inflation expectations for the year ahead: +3.1% vs +2.9% prev, 5-year horizon: +3% vs +2.8% prev, consumer sentiment expected: 77.8 vs prev: 79.4) 

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What Happened Yesterday

Market Movements as of New York Close 25 Apr 24

The BoJ kept interest rates at 0%-0.1% in its monetary policy meeting as expected. The BoJ also said it will conduct JGB, CP, corporate bond buying in line with the decision made in March 2024. Additionally, it raised its 2024 median forecast for core CPI to +2.8% from +2.4% in JAn 2024. The JPY weakened further, pushing the USDJPY up by more than +0.20% from 155.56 to above 156.

Advanced print for US GDP Growth Rate showed that the US economy grew by merely +1.6% Year-on-Year in Q1’ 24 (vs +2.5% expected and +3.4% in Q4’ 23). This was the weakest growth since the economic downturn in early 2022. The Personal Consumption Expenditure Price Index rose +3.4% in Q1’ 24 on an annualised basis, up from +1.8% in Q4’23. Weaker growth but higher inflation is not good news for the economy and will make it hard for the US Federal Reserve to boost the economy with interest rate cuts.

The disappointing US inflation data (PCE QoQ), which surprised to the upside, drove US bond yields higher. The US 2-year bond yield rose +0.07% to 4.99% while the 10-year yield rose +0.06% to 4.70% resulting in the US Treasury Yield curve inversion widening slightly to 0.29%. 

The US stock futures traded sideways through the Asian and London trading session yesterday before the weaker than expected US GDP data and higher than expected inflation data (PCE QoQ) sent the S&P 500 futures down -0.63% to 5039.5.

The US stock market opened lower from Wednesday (S&P 500: -1.02%, Dow Jones: -1.06%, Nasdaq: -1.83%). It then continued falling in the opening hour before recovering  to offset some of the losses made earlier in the day. The S&P 500 finished -0.46% lower on the day (high: -0.27%, low: -1.60%), the Dow Jones lost -0.98% (high: -0.79%, low: -1.84%) while the Nasdaq was down -0.55% (high: -0.30%, low: -1.83%) after selling off more than 1% earlier in the trading session.

[Earnings]
Microsoft (NASDAQ: MSFT, +4.31% in after market trading) beat Wall Street estimates for third-quarter revenue and profit due to adoption of AI in its Azure cloud. Earnings: $2.94 vs $2.82 expected, Revenue: $61.9 billion vs $60.80 billion expected.

Alphabet (NASDAQ: GOOGL, +11.56% in after market trading) beat earnings expectations and surprised investors with its first-ever dividend of 20 cents a share and a $70 billion stock buyback. Earnings: $1.89 vs $1.50 expected, Revenue: $80.54 billion vs $78.59 billion expected.

Intel (NASDAQ: INTC, -7.75% in after market trading) gave poor guidance for the current quarter (Q2’ 24 guidance: 10 cents per share vs 25 cents per share expected). Earnings: 18 cents vs 14 cents expected, Revenue: $12.72 billion vs $12.78 billion expected

Snap (NASDAQ: SNAP, +24.56% in after market trading) had a revenue increase of 21% from $989 million in the same period last year which sparked a double-digit push in the stock price in after market trading. Earnings: 3 cents vs a loss of 5 cents expected, Revenue: $1.19 billion vs $1.12 billion expected.

As a result of the stellar performance of MSFT and GOOGL, S&P 500 futures are up +0.81% while Nasdaq futures spiked +1.15% in after-market trading hours.

The crypto market traded sideways in yesterday’s trading session.
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Headlines & Market Impact

Weak GDP, strong prices, highlight Fed dilemma

Notable Snippet: U.S. economic growth in the first quarter fell below the Federal Reserve’s estimates of the economy’s long-run potential for the first time in nearly two years, but the signs of slowing were accompanied with fast inflation that, if sustained, would pose a particular dilemma for the central bank.

Fed officials through much of their battle with a pandemic-driven breakout of inflation said it would take a period of below-trend growth to bring price pressures fully into line, and the 1.6% rate of expansion registered in the first quarter met that mark after a period where the economy grew faster than the central bank’s median 1.8% estimate of noninflationary potential.

But prices have remained sticky, with the data on Thursday also showing the personal consumption expenditures price index over the first quarter rising at a 3.4% annual rate versus the Fed’s 2% target.

Investors and analysts at first blush put more weight on the high inflation figure than on the signs the economy may finally be cooling as the Fed has expected.

Data from the CME Group’s FedWatch tool showed the probability of an initial Fed rate cut slipping across the board, with a June cut now given less than 10% odds, bets on a September cut slipping below 58%, and a second cut in December given less than even odds.

There are reasons to think the 1.6% first-quarter growth rate overstates any weakness in the economy, said Nationwide Financial Market Economist Oren Klachkin, with sizable drags from imports and inventories unlikely to persist through the year.

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Morgan Stanley May Soon Allow Brokers to Pitch Bitcoin ETFs to Customers: Report

Notable Snippet: Morgan Stanley (MS) is looking to allow its 15,000 brokers to recommend bitcoin (BTC) exchange-traded funds (ETF) to their customers, according to a report from AdvisorHub.

The Wall Street giant opened up bitcoin ETF purchases after they had been approved earlier this year. However, this was done only on an unsolicited basis. The bank is now looking to let its brokers pitch bitcoin ETFs directly to its customers, the report added.

The move is a testament to the demand for the spot ETFs and could bring additional inflows into the funds. The ETFs allow the customers to reap the benefits of investing in the oldest cryptocurrency without direct exposure.

“We’re going to make sure that we’re very careful about it…we are going to make sure everybody has access to it. We just want to do it in a controlled way,” AdvisorHub reported, citing a Morgan Stanley executive.

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Exclusive: ByteDance prefers TikTok shutdown in US if legal options fail, sources say

Notable Snippet: TikTok owner ByteDance would prefer to shut down its loss-making app rather than sell it if the Chinese company exhausts all legal options to fight legislation to ban the platform from app stores in the U.S., four sources said.

The algorithms TikTok relies on for its operations are deemed core to ByteDance’s overall operations, which would make a sale of the app with algorithms highly unlikely, said the sources close to the parent.

TikTok accounts for a small share of ByteDance’s total revenues and daily active users, so the parent would rather have the app shut down in the U.S. in a worst case scenario than sell it to a potential American buyer, they said.

A shutdown would have limited impact on ByteDance’s business while the company would not have to give up its core algorithm, said the sources, who declined to be named as they were not authorised to speak to the media.

It said late on Thursday in a statement posted on Toutiao, a media platform it owns, that it had no plan to sell TikTok, in response to an article by The Information saying ByteDance is exploring scenarios for selling TikTok’s U.S. business without the algorithm that recommends videos to TikTok users.

In response to a Reuters request for comment, a TikTok spokesperson referred to ByteDance’s statement posted on Toutiao.

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Phan Vee Leung
CIO & Founder, TrackRecord