We had good news, bad news, and news that are fundamentally good for the economy and bad for the global rate cut expectations.
Good news. The European economies performed better than expected last quarter. Spanish and Italian growth tempered the German contraction, fueled the idea that the Eurozone is also having a lighter version of ‘soft landing’. The IMF raised its global growth forecast from 2.9% to 3.1% this year saying that the strong US growth and stimulus measures in China should show in better growth numbers. Yes, but the latest PMI numbers showed that manufacturing in China shrank for the 4th month and the CSI 300 index already gave back all gains accumulated on last week’s series of stimulus news; the China story remains in limbo.
Bad news. Good growth in Spain came along with an unexpected jump in inflation. More euro area countries will be releasing their inflation figures today. And given that growth numbers were better-than-expected, a set of stronger-than-expected inflation data for the Eurozone should throw a floor under the euro’s weakness, by weakening the European Central Bank (ECB) doves’ hands. The euro which partially reversed yesterday’s losses, is still under decent selling pressure this morning with a crowded resistance into the 200-DMA which stands near the 1.0840 level. The current market pricing suggests a 75% chance for an April ECB cut. But April feels early with the upside risks building for inflation. Therefore, an uptick in inflation figures could help the EUR/USD go back above its 200-DMA.
All Eyes on the Fed
The Federal Reserve (Fed) will announce its latest decision today and Jay Powell will tell investors about his version of where things are going. Data-wise, we had a mixed bag of news from the US as well, both in terms of economic data and corporate results.
The bad-good news was that the US job openings increased in December - not cool when you helplessly want the US jobs market to loosen so that the Fed could cut rates.
But the bad, good news is that we still have many layoff news on the headlines. PayPal (NASDAQ:PYPL) cuts 2500 jobs, UPS plans 12’000 job cuts, Meta (NASDAQ:META), Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOGL) and even Microsoft (NASDAQ:MSFT) cut jobs. So far in January, 23’500 jobs were terminated.
The ADP report is expected to print a fairly soft 145K new private job openings in January.
Anything Less Than Mind-Blowing Is Weak.
Microsoft released its latest quarterly results after the bell yesterday. Both earnings and revenue were better than expected, the cloud unit Azure made 30% more last quarter compared to the final quarter of last year where OpenAI was not yet part of our lives. Their results overshadowed Google’s cloud business – which grew only 24% more than the same time a year earlier.
BUT. But Microsoft stocks fell up to 2% in the after-hours trading because the company gave a light quarterly outlook. Anything less than mind-blowing is weak at the current valuations. Therefore, profit-taking in Microsoft and elsewhere is perhaps on today’s menu. Google fell almost 6% and AMD (NASDAQ:AMD) fell more than 6% in the after-hours trading after their results failed to match expectations.
Is this the beginning of profit-taking and correction? Could be. The S&P 500 has been running from record to record this January, mostly due to the extension of the Big Tech rally. MAMAA stocks are up by more than 10% since the beginning of January. Nvidia (NASDAQ:NVDA) – which became the icon of the AI rally and which hit a fresh record yesterday, is up by almost 35% since the beginning of this month. Investors have been piling in despite overbought market conditions and overstretched valuations. Yet the earnings misstep could well be a trigger for long-awaited profit-taking across the US technology stocks. If that’s the case, even a soft Fed could hardly make investors feel better.
Bear in mind that despite the rise in interest rates last year, technology stocks, which are usually responsive to Federal Reserve rates, largely disregarded these increases. The dominance of AI in the market overshadowed every economic development. It's worth noting that profit-taking might occur even in the face of potential improvements in financial conditions.