Last week, Higher US CPI casts doubt on June rate cut. Tesla announces global workforce reduction exceeding 10%. Bank of Canada maintains interest rates, influencing the housing market. Fitch downgrades China’s credit outlook. Apple’s iPhone sales forecast revised downwards. Goldman Sachs bullish on gold, targeting $2700 by year-end.
Vikki Zhao and Olena Li
PUBLISHED Mon, April 15, 2024, 12:30 PM EST. 6 min read.
Over the past week, economic indicators have highlighted a robust economy, driven by strong employment figures, which has contributed to a gradual decrease in inflation rates. Despite some unexpected higher inflation readings this year, the focus has primarily been on improved economic projections. Yet, today’s March Core CPI increase of +0.4%—the third consecutive surprise on the high side—has made the stock market more cautious. Following this report, bond yields surged with the US 10-year Treasury yield reaching 4.55%, and the market’s expectations for Federal Reserve rate cuts by the end of the year reduced to one or two.
After a 28% surge in the S&P 500 from the lows in October through March, persistent inflation, adjusted expectations for the Federal Reserve, and rising bond yields might pose short-term challenges for stocks. The direction and intensity of potential market weaknesses, whether in price or time, will heavily depend on forthcoming economic data. Key data points to watch include the Q1 earnings season starting last week, March’s PPI, retail sales, April’s PMI, Q1 GDP, and March’s PCE, with the Core PCE at 2.8% year-over-year currently being a critical indicator for the Fed.
Technically, there are signs of decelerating momentum, though this is in the context of a strong medium-term uptrend. The 20-day moving average (DMA) at 5183, which has been a support level since October, is now being tested; it’s worth monitoring over the next few days to confirm any definitive break. The next level of support is the 50 DMA at 5100, and substantial support is found around 4800, a pivotal point for new all-time highs.
“If the recent minor consolidation marks the start of a typical 5-8% pullback, it could create opportunities to invest in quality companies at favorable prices.”
Tony Yuan
Head of Products and Strategy at AimStar
On a more detailed level, today’s market dynamics indicate a preference for companies with robust and resilient earnings trends, likely leading to continued dominance of technology-oriented sectors for now. Meanwhile, the average S&P stock and smaller companies, which had been outperforming, are now seeing a decline in their relative strength, returning to previous lows. Also, sectors like Real Estate, Utilities, and Banks have been hit hard by the rise in bond yields. How these sectors adapt in the coming days and weeks during the Q1 earnings season, alongside the evolving macroeconomic landscape, will shed light on future performance trends.
Over the last week, economic data highlighted that robust employment is bolstering economic growth; however, this robustness is also slowing the reduction of inflation rates. The job market continues to support the strength of equities, but persistent inflation poses a short-term challenge due to the anticipated delay in Federal Reserve rate cuts and the consequent rise in bond yields (with US 10-year and 2-year yields at their highest since last November).
The March Jobs Report showed a “Goldilocks” scenario with substantial job gains and minimal wage pressure. Nonfarm payrolls increased by 303,000, significantly surpassing the expected 205,000. The unemployment rate edged down to 3.8% from 3.9%, with wage growth at just 0.3%.
The March CPI Report indicated a monthly increase in Core CPI of 0.36%, which was higher than the anticipated 0.3%, keeping the year-over-year Core CPI steady at 3.8%. This marks the third consecutive month at the start of the year with higher-than-expected inflation, likely causing the Federal Reserve to maintain its current policy stance for an extended period.
GOOD NEWS
Good news for TSMC shareholders: TSMC (NYSE: TSM) surged to a record high on the Taiwan Stock Exchange, up 4% to 817.0 New Taiwan Dollars. The U.S. Department of Commerce approved a $6.6 billion subsidy for its Arizona plant to produce advanced 2nm chips.
Good news for Delta Air Lines shareholders: Delta Air Lines (NYSE: DAL) shares surged 4% as the company exceeded earnings expectations for Q1 and projects record-breaking revenue for Q2.
Good news for Xpeng Motors shareholders: Xpeng Motors (NYSE: XPEV) surged over 9% in pre-market trading on Wednesday, driven by its official announcement to enter the Hong Kong and Macau markets, with deliveries expected to start in the third quarter of this year.
Good news for Goldman Sachs Group shareholders: Goldman Sachs Group (NYSE: GS) surged 4.12% as its first-quarter profit jumped 28%, driven by a rebound in debt underwriting and trading, boosting its investment banking division. Revenue rose 16% year-on-year to $14.2 billion, surpassing Wall Street’s estimate of $12.98 billion.
Good news for copper investors: Prices have risen more than 10 per cent this year as disruptions at major mines threaten refined metal production at the Chinese plants that account for more than half of the world’s supply. “Copper’s second secular bull market this century is being driven by booming decarbonization-related demand growth,” say Citgroup Inc. analysts. “Only higher prices will solve these deficits.”
BAD NEWS
Bad news for SoundHound AI shareholders: SoundHound AI (SOUN.US) plummeted 12% in pre-market trading on Wednesday, impacted by a $150 million equity distribution agreement prompting selloffs.
Bad news for CarMax shareholders: US used car retailer CarMax (NYSE: KMX) plunged by as much as 9% after reporting lower-than-expected earnings and revenue for its fourth fiscal quarter.
Bad news for Apple Inc. shareholders: Apple Inc. (NASDAQ: AAPL) dropped 0.36% as Samsung regained the top spot in global smartphone manufacturing, capturing a 20.8% market share in the first quarter, while Apple ranked second with 17.3%.
Bad news for lithium investors: Prices may have bottomed out, but they are struggling to rebound, partly because miners, refiners and carmakers are still working through the mound of surplus stock clogging up the supply chain. “It’s still a market where supply is set to outpace demand growth,” says Morgan Stanley analyst Amy Gower. “We are starting to see a supply reaction, but we need to stay in this pain zone for a little bit longer.”
Bank of Canada holds interest rate steady at 5%
The Bank of Canada kept its benchmark interest rate unchanged at 5% in a widely expected decision. Analysts had anticipated this move amid recent data indicating a slowdown in inflation and job market growth, raising expectations for a potential rate cut in June. While inflation remains a concern, recent easing in CPI and core inflation trends were noted by the central bank, which emphasized the need for sustained evidence of this downward momentum. Governor Tiff Macklem previously indicated that it’s premature to ease monetary policy, citing lingering upside risks to inflation.
Bank of Canada Holds Rates Steady, Spring Housing Market in Limbo
The Bank of Canada maintained its interest rate at 5%, leaving Canada’s spring real estate market in a “holding pattern.” Despite this, some dovish remarks from the central bank suggest that stronger-than-expected economic data won’t deter the possibility of rate cuts this year. Rishi Sondhi, economist at TD Bank, remarked that the bank’s decision “certainly isn’t helping the spring market,” and his team anticipates subdued conditions due to uncertainty about rate cuts. Additionally, Wednesday’s inflation report from the U.S. Bureau of Labor Statistics showed consumer prices rising more than expected, with rents remaining strong, which could further impact Canada’s rate environment.
Suncor CEO Open to Selling Petro-Canada Gas Station Chain
Suncor Energy CEO Rich Kruger expressed openness to selling the company’s Petro-Canada retail business, a network of over 1,500 Canadian gas stations, during the 2024 BMO & Canadian Association of Petroleum Producers Energy Symposium. The decision to retain the stations in 2022 followed pressure from activist investor Elliott Investment Management, but Kruger indicated a potential shift in strategy, although not an immediate priority. Despite estimating Petro-Canada’s value at $3.8 billion to $5.7 billion, Kruger emphasized that revisiting the decision remains a possibility for the future.
Toronto Poised to Overtake Vancouver as Canada’s Priciest Housing Market
A forecast by Royal LePage predicts that Toronto will surpass Vancouver as Canada’s most expensive housing market by the end of the year. Following stronger-than-expected sales and price gains in the first quarter of 2024, the real estate company has revised its forecast for home prices upward across the country. The report indicates that Toronto’s housing market is expected to lead the nation, with prices forecasted to rise by 10 percent in the fourth quarter, surpassing $1.1 million. Meanwhile, Montreal is also anticipated to see significant growth, with prices projected to increase by 8.5 percent. Despite a more subdued performance in the Greater Vancouver Area, Royal LePage expects prices to rise by 5.5 percent in the fourth quarter. Overall, while housing markets have shown signs of recovery from the pandemic-induced correction, they have not yet fully rebounded, with home prices still below the peak reached in early 2022.
US CPI Data Exceeds Expectations, Sparking Concerns Over Rate Cut Prospects
The US March seasonally adjusted CPI rose to 3.5%, exceeding the expected 3.4%, prompting market concerns about the Fed’s rate cut plan in June. With gasoline and housing prices rising, the Consumer Price Index (CPI) surpassed expectations, further fueling doubts about whether the Fed would cut rates in June. Following the data release, gold prices briefly dropped by $16 before quickly rebounding, while the US dollar index and USD/JPY exchange rate both rose, reaching a 34-year high, while non-US currencies collectively weakened. US stock index futures also declined, with Dow futures down 1%, S&P 500 futures down 1.3%, and Nasdaq futures down 1.6%. This report further indicates that despite the Fed keeping rates at their highest level in 20 years, progress in curbing inflation may be stalling. The data significantly impacted the market, reflecting concerns about inflation and rate cut prospects.
US March Inflation Data Dents Expectations for June Fed Rate Cut
US March inflation report exceeds expectations, dampening Fed’s June rate cut outlook, delaying the anticipated rate cut by 40 basis points and pushing the first cut to July. Goldman Sachs expects rate cuts in July and November 2024, while UBS, more pessimistic, rules out a June cut. The US Producer Price Index (PPI) data, expected later today, may offer clearer insights into March inflation trends.
Bull Market for Gold Unstoppable, Year-end May Break $2700 Mark
Goldman Sachs states that gold is currently in a solid bull market state and predicts that by the end of this year, it may surpass the significant level of $2700 per ounce. Recent data shows that spot gold reached a historical high over the weekend, while gold futures prices also hit a record high. Recent support has mainly come from Iran’s attack on Israel, which could trigger larger geopolitical conflicts. Despite inflation data surpassing expectations, the Fed’s slowdown in rate hike expectations has provided some support for gold. Goldman Sachs indicates that the primary driving force behind the gold rally comes from new incremental factors, including accelerated purchases of gold by central banks in emerging markets and an increase in Asian retail buyers. Taking into account macroeconomic policies and geopolitical risks, Goldman Sachs has raised its year-end gold price forecast to $2700 per ounce.
Large-cap US stocks experience significant outflows of funds
Earlier this week, the release of the Consumer Price Index (CPI) in the United States exceeded expectations, leading to the largest single-week outflow of funds from US equities since December 2022. According to the weekly report from EPFR, a division of Bank of America, large-cap US stocks saw an outflow of $15.8 billion as of Wednesday, with total outflows from US equities reaching $19.6 billion. The week up to Wednesday encompassed a period of stock market panic triggered by hawkish comments from the Federal Reserve and oil prices surging above $90 per barrel last Thursday, as well as a decline following stronger-than-expected inflation data in the United States on Wednesday (the 10th). The Dow Jones Industrial Average, representing blue-chip stocks, has fallen over 1% since the beginning of this week.
Fitch Downgrades China’s Credit Rating Outlook to Negative, Economy Faces Challenges
Fitch revised China’s credit rating outlook from “stable” to “negative,” while maintaining its A+ rating. This adjustment primarily reflects concerns over the growing public debt, especially amid a slowdown in economic growth. Fitch pointed out that as China transitions to a more sustainable growth model, its public finances are facing increasing risks, adding to economic uncertainties.
It is projected that due to the sluggish real estate market and weak consumer spending, China’s GDP growth rate will decline to 4.5% in 2024, below the government’s forecast of 5%. Although anticipated fiscal stimulus measures may partially offset adverse factors, it also implies a more severe debt issue. Additionally, the ratio of government debt to GDP is expected to rise to 61.3%, mainly due to the government’s increased fiscal support to stimulate economic growth. Despite these challenges, Fitch still maintains China’s A+ credit rating, as its growth prospects remain relatively robust compared to other countries.
HSBC Sells Argentine Business at Substantial Loss
HSBC (LON:HSBA) has announced its exit from the Argentine market, selling off related businesses as part of a restructuring effort. The bank has reached a legally binding agreement with Grupo Financiero Galicia to sell its Argentine operations for $550 million. However, this sale is expected to result in a significant pre-tax loss of up to $1 billion. This loss will be reflected in the first-quarter financial report, along with at least $4.9 billion in historical cumulative foreign exchange reserve losses. HSBC has recently undergone extensive restructuring, having previously sold its Canadian operations to the Royal Bank of Canada, as the company focuses more on its core markets in Asia and Europe.
Apple iPhone Sales Outlook Lowered by Mizuho Analysts, Supply Chain Risks Warned
Mizuho analysts have lowered their 2024 iPhone sales forecast for Apple (NASDAQ:AAPL) by 7%, now predicting a decline to 217 million units, down from the previous estimate of a 6% drop. They advise Apple to reduce iPhone production in the first half of the year to avoid supply chain constraints. Despite short-term challenges, optimism remains for the iPhone 16’s launch in the latter half of the year, featuring enhanced AI capabilities, potentially leading to improved sales and production growth in 2025.
Apple loses its global smartphone manufacturer throne
According to data from research firm IDC, Samsung (KS:005930) has successfully regained the title of the world’s largest smartphone manufacturer from Apple (NASDAQ:AAPL) due to poor performance of the iPhone in the first quarter. In the first quarter of 2024, global smartphone shipments increased by 7.8%, totaling 289.4 million units. However, during this period, Apple’s smartphone shipments declined by about 10%. Samsung reclaimed the top spot with a market share of 20.8%, after being surpassed by the strong performance of the US tech giant Apple in the previous quarter. Apple, on the other hand, fell to second place with a market share of 17.3%. Meanwhile, China’s top smartphone manufacturer Xiaomi (OTC:XIACF) entered the top three for the first quarter with a market share of 14.1%.
Tesla announces global workforce reduction of 10%
Tesla reportedly informed all employees on Monday of a global workforce reduction exceeding 10%, equivalent to laying off 14,000 people. Currently, Tesla has a total workforce of 140,000 employees. This layoff marks Tesla’s fifth large-scale layoff, following layoffs of 2% in 2017, 9% in 2018, 7% in 2019, and 3% in 2022. In the layoff announcement, it was stated, “Over the years, we have rapidly expanded globally and built multiple factories. However, after rapid growth, some areas of positions and functions have become redundant. It is crucial to thoroughly review all aspects of the company and reduce costs and improve productivity to prepare for the next stage of growth. Therefore, we have conducted a comprehensive review of the organizational structure and made the difficult decision to implement a global workforce reduction of over 10%. Although we are very reluctant to lay off employees, it is necessary. This will enable us to remain lean, innovative, and drive us into the next growth phase.”
Inflation
Statistics Canada will release its latest inflation reading on Tuesday morning. The consumer price index rose 2.8 per cent on a year-over-year basis in February compared with a gain of 2.9 per cent in January.
Housing starts
Canada Mortgage and Housing Corp. will report its preliminary figures for housing starts in March on Tuesday. The seasonally adjusted annual rate of housing starts jumped 14 per cent to 253,468 in February as starts of multi-unit urban homes increased 20 per cent.
Federal budget
Finance Minister Chrystia Freeland will present the federal budget on Tuesday. The formal presentation of the spending plan comes after Ottawa has already made several budget-related announcements in recent days aimed at helping solve the housing crisis in the country.
Bank annual meetings
A pair of Canada’s big banks will hold their annual meetings this week and answer questions from shareholders. Bank of Montreal is set to hold its gathering on Tuesday morning, while TD Bank Group will hold its meeting on Thursday morning.
U.S. March Retail Sales Data
The most important economic data of this week — the U.S. March Retail Sales Data will be released. The market generally expects a month-on-month growth of 0.4% in U.S. March retail sales, continuing the rebound trend from February. This data is an important indicator for assessing the resilience of U.S. consumers. The economic team at Wells Fargo Bank pointed out that despite facing multiple challenges, they believe consumer spending will not significantly slow down, especially with wage growth remaining robust.
The most anticipated earnings releases for the week of April 15, 2024 are Netflix #NFLX, TSMC #TSM, Bank of America #BAC, Goldman Sachs #GS, UnitedHealth #UNH, ASML #ASML, Johnson & Johnson #JNJ, United Airlines #UAL, American Express #ADP, and Intuitive Surgical #ISRG.
