The Federal Reserve (Fed) decision yesterday was - interesting. As expected, the Fed kept its rates unchanged and said that they are not confident about cutting the interest rates as inflation has started to show signs of heating up. Jerome Powell reassured that the Fed’s next move will unlikely be a rate hike. That was a relief. Then, the Fed said that it will start tapering QT. It sounded like ‘the rates must stay longer in the oven but taste this – in the meantime’.
The market reaction to the decision was mixed. The stocks first gained then erased losses. The S&P 500 closed the session down by 0.34%. The treasury yields fell. The 2-10-year portion of the yield curve remains inverted, mind you, since summer 2022. Maybe – but just maybe – we will finally see recession arrive in the US? Note that the latest GDP print in the US was surprised by a sharp slowdown to 1.6%, from above 3% printed a quarter earlier, and down from 5% printed the quarter before that. Interest rate swaps still price in one rate cut for 2024, sometime by the year end.
Data-wise, the ADP report came in stronger than expected yesterday with 192K new private job additions in April compared to around 180K expected by analysts, but job openings further fell and the ISM manufacturing PMI fell into the contraction zone while price pressures continued to rise. US oil inventories on the other hand jumped more than 7-mio barrels according to yesterday’s EIA data. All eyes are on the official jobs data due tomorrow.
The cocktail of no-rate-cut-in-horizon from the Fed, soft economic data, rising price pressures and rising US oil inventories sent the barrel of US crude below the $80pb level. News that the US and Saudi Arabia are working on a new pact to help ease tensions in the Middle East strengthens the bears’ hands as well. Note that yesterday’s decline pushed the barrel of crude into the medium-term bearish consolidation zone and paves the way for deeper losses. Next support is seen at $78pb – the 100-DMA.
In the FX, the US dollar eased yesterday, but a part of the move was explained by the sharp fall in the USD/JPY which tanked from 157.50 to 153 within minutes, fueling speculation that the Bank of Japan (BoJ) certainly has its fingers behind the move. The USD/JPY is back above 155 this morning, but this time, the downside correction was certainly big enough to clear speculative longs and give the holders of short yen positions cold feet. The BoJ has drawn the red line at the 160 level this week, saying no one goes above. Let’s see if enough traders are willing to challenge that view.
Elsewhere, the EUR/USD rebounded past the 1.07 level, while Cable settled above 1.25. The USD/CHF continues its steady ascent on the back of the growing divergence between the Fed – unable to cut rates because of rising inflation and the SNB – well positioned to cut rates again thanks to subdued price pressures. Gold sees support at $2284 – the minor 23.6% Fibonacci retracement on October to April rebound. Softer US yields, rising inflation, ambiguous direction for equities and uncertain geopolitical landscape should keep appetite robust near the $2300 support.
Chips & Cannabis
Amazon (NASDAQ:AMZN) gained more than 2% yesterday as its cloud business grew more than expected in Q1 thanks to AI. AMD (NASDAQ:AMD) fell more than 9%, as the company gave a weak outlook for game chip demand and Super Micro Computer (NASDAQ:SMCI) tumbled 14% as earnings missed lofty expectations. Fears regarding a slowdown in chip demand pulled Nvidia (NASDAQ:NVDA) nearly 4% down, while Micron Technology (NASDAQ:MU) (NASDAQ:MU) fell almost 3%. Happily, Qualcomm (NASDAQ:QCOM) rebounded 4% in the afterhours trading on solid forecast for the current period.
Cannabis stocks, which were flying high on Tuesday following the US decision to reclassify marijuana as a less dangerous drug, fell yesterday. Beyond the short-term volatility, the reclassification will have a concrete positive impact on pot companies’ profit margins through tax breaks, hence the sector could see a sustainable growth following the decision. I don’t think that we will see another bubble in pot stocks – similar to the one we saw in 2018 and again in 2021, but having exposure to a Marijuana ETF – like YOLO – wouldn’t hurt.
Apple Day!
Apple (NASDAQ:AAPL) is due to report Q1 results today after the bell. Expectations are soft given that Apple’s Chinese business got a major hit in Q1 as competitors increased their market share against the giant Apple. The chances are that, the actual results won’t blow anybody’s mind.
What investors now expect is plans and projects regarding how Apple will integrate AI into its devices and catch up with its AI delay. Good news is, because Apple is not seen as a cutting-edge technology company – but also a luxury brand – any promising step in AI could get a decent leverage from the company’s high brand value. Therefore, if investors are convinced that Apple’s got a robust AI plan, we could see a positive reaction to otherwise weak quarterly results. Pricewise, Apple is down by 15% since the December peak, and near the major 38.2% Fibonacci retracement on YTD selloff. Either it will stay in the positive trend and attempt a rebound, or it will sink into the medium-term bearish consolidation zone.