Hawkish. The new quarter started on a hawkish note. The European markets were closed, but the S&P 500 closed the first trading session of the new quarter in the negative after the ISM data unexpectedly jumped into the expansion zone in March, the prices accelerated faster than expected and Atlanta Fed’s GDPNow spiked to 2.8% from 2.3%. Once again, the US data suggests that the Federal Reserve (Fed) should be in no rush to cut the interest rates. The only thing that could pressure the Fed to cut rates sooner rather than later is the end-of-year election and the popular idea that the Fed may not be able to cut rates this year if it doesn’t start around summer. But besides the election pressure, the economic data shows no sense of emergency for a June cut. That’s what the market reaction to yesterday’s strong economic data told me yesterday. The US 2-year yield jumped 12 basis points to above 4.70%, the 10-year yield spiked to 4.30%. The Fed swaps priced in a 12bp cut for June, meaning that the odds of a June rate cut fell to – and shortly - below 50% yesterday for the first time this year. As such, the US dollar index kicked off the new quarter on solid footage, the dollar index soared past the 105 level. The strong dollar sent the EUR/USD to 1.0732, Cable slipped below its 200-DMA and the USD/JPY is preparing to test the 152 level with limited upside potential above this level on the threat that the Japanese will intervene to stop the yen depreciation if the USD/JPY exceeds the 152 level.
Tesla on the Chopping Block
The softening Fed rate cut expectations didn’t derail the Big Tech rally in the first quarter, but it didn’t allow the rally to broaden beyond the Big Tech either. On the contrary, we saw a further narrowing of the rally within the so-called Magnificent 7 – where Apple (NASDAQ:AAPL) and Tesla (NASDAQ:TSLA) fell of the race: Apple for its falling iPhone sales in China and its AI miss and Tesla on its slowing deliveries. Tesla will reveal its latest quarterly deliveries report in the coming hours and analysts predict a large decline in Q1 deliveries. If that’s the case, it would mean that Tesla’s recent price cuts did nothing but to squeeze the profit margins in the latest quarter. Tesla started hiking its EV prices in many locations including China, but investors will likely remain skeptical regarding the impact of the price hikes if the sales growth reverses. If investors sent Tesla’s stock price skyrocketing in the previous years, it was mostly due to the expectation of around 50% annual growth. If the growth narrative falls under a bus, it will be hard to keep Tesla at the current valuation (PE ratio of around 67). In this context, we could only see Tesla’s stock price retreat further. My downside target stands at $150 per share.
What to Watch?
Besides the car deliveries, investors will be watching the latest JOLTS data and US factory orders that are due today. Job openings are expected to have further fallen while factory orders are expected to have jumped in February. Any positive surprise on both data should continue to soften the Fed doves’ hands into Friday’s official jobs data and back a further rally in the US dollar across the board.
Elsewhere, the German CPI data and Eurozone final manufacturing data will be closely watched today. Soft figures could further revive the European Central Bank (ECB) doves and increase the downside pressure on the EUR/USD.
Gold, Oil Rise on Damascus Bombing
Copper gained 1% yesterday on strong Chinese PMI data while gold defies the higher US yields and a stronger dollar. The price of an ounce hit a fresh record yesterday on the back of rising uncertainties regarding the actual risk rally and the mounting geopolitical tensions after Israel has reportedly bombed the Iran embassy in Damascus. Also, note that the strong EM and central bank demand this year makes gold an investors’ darling. The willingness to diversify the US dollar holdings due to a less-than-ideal US fiscal discipline will likely remain in play. As such, gold is certainly one of the best hedges against a potential risk meltdown in the foreseeable future.
In energy, US crude flirted with the $85pb level on the Iranian embassy bombing by Israel. On the supply side, OPEC is expected to keep its production cuts in place until the end of the quarter, but the latter has a decreasing impact on the global supply as US producers replace the OPEC supply gap. US crude exports just set their fifth monthly record since Europe imposed sanctions on Russia. As such, Russian sanctions and OPEC cuts are buttering the bread of American exporters. Exxon (NYSE:XOM) gained more than 20% since January, Chevron (NYSE:CVX) is up by 14% and has just stepped into the bullish consolidation zone – after having cleared the major 38.2% Fibonacci retracement on 2022 to 2024 selloff – hinting at a further extension of gains toward the $165 per share level.