Week of April 22, 2024 Recap
Fed Pricing:
Fed currently in blackout so there isn’t much to report with regards to their speeches
End of Wednesday we saw probability of July cut at around 50% with entire year implying 43bps worth of cuts.
End of Friday we saw probability of July cut at around 35% with entire year implying 33bps worth of cuts.
News flow:
Real GDP cooled to 1.6% (prior was 3.4% and well below bbg estimates of 2.6% and Fed’s 2.1% estimates)
Headline PCE at 3.1% (estimates at 3%), core PCE at 3.7% (estaimtes at 3.4%)
Major Earnings:
MSFT: Azure revenue grew 31%, AI continue to be center stage, heavily investing
TSLA: retraced, robotaxi and the new model release earlier than anticipated
META: sold off due to higher than expected capex spending, investing heavily in to AI
GOOGL: Operating Margin beat (+4%), first dividend, cost cutting (10k job cuts), investing heavily in to AI
Ford revenue and EPS beat. Guidances higher on FCF, reduction in expected capital expenditures
GM revenuye beat, raises fiscal year 24 profit guidance (fueld by North american sales)
Visa EPS (2.51) beats estimates, maintains guidances; comments on resilient consumer spending
"At Walmart, we are now seeing prices that are in line with where they were 12 months ago. I haven’t been able to say that for a few years now. The last few weeks, we've taken even more prices down in areas like produce and meat and fresh food" - wmt ceo interview
Ukraine likely will get aid after passing of bill
Thoughts:
While this weeks economic releases continue to worry with regards to inflation down the road, earnings so far have take center attention. Tech earnings along with various barometer stocks show economy still growing rather strong.
Its important to note that prior to this week we had 3 weeks of decline. Technically, you’d expect the market to gravitate for any excuse to rebound. Earnings this week was the excuse.
Post earning price actions in some stocks may not be the best indication of the results released. I personally think the markets always tend to linearly extrapolate till expectations are impossible to achieve thus we saw the performance of META and NFLX recently. I think the companies overall did fine.
It is also evident that investors continue to be very excited about the future of AI and the current capital investment in the space. Some of the numbers released by MSFT, GOOGL, and META show a combined $100B+ a year being invested in research and product. I would caution that its important for investors investing in this area to fully understand how the money is used and the ongoing results achieved. Current valuations show high certainty there will be demand for products yet to be released. I worry we will see another METAverse.
Fed
This upcoming weeks focus will be on the Fed FOMC meeting. Since a cut is obviously not likely, what should investors focus on? I think the tone and the attitude for the rest of the year.
What I’m looking for is confirmation with regards to the last Powell speech. In that weeks recap, I mentioned there is a regime shift in the underlying policy. I anticipate Powell will further reiterate his stance towards not cutting anytime soon and may even push it out to 2025. I think this will results in more equity volatility and uncertainty. With equity prices where they are, I’d anticipate more range bound moves.
In reviewing the last several months of policy guidance by the FED I think they inherently got ahead of themselves by declaring policy rates are most likely at the peak for the current cycle. Imbeded in that declaration is somewhat of a victory lap over inflation being controlled. What the FED missed, in my opinion, is the reflexive consequences/impact their guidance had on inflation itself. The policy shift definitely ignited some animal spirits in the economy which in turn became inflationary by itself.