Market Note (Feb 20th)
Stocks Decline Ahead of Nvidia's Crucial Earnings; Deflation picture complicated
US Equities kicked off the week in the red as investors remain cautious ahead of NVDA earnings to be reported after the closing bell tomorrow (2/21). As noted last week expectations are very high given the stock price movement, since the last earnings release. The stock is trading ~5.6% lower at the time of print, however, the bigger debate is whether this print will mark a ‘tactical top’ or a ‘break-out’ moment for the stock and AI narrative. The last few earnings reports indicate the latter as any significant downside has been short-lived due to strong fundamentals and the AI narrative.
Apart from NVDA, the macro focus has been on the complicated picture of 'disinflation’ and the path of central banks’ monetary policy. Overnight, the Swedish CPI print for January showed a larger-than-expected increase to +5.4% (vs. +5.0% expected). That led to growing doubts about how soon the Riksbank would be cutting rates and added to fears that the global inflation path would still be bumpy this year, not least after the US CPI and PPI prints last week. Then at 0830hrs, the annual inflation rate in Canada fell to 2.9% in January of 2024, the lowest since June, from 3.4% in the previous month, and well below market expectations of 3.3%. The result marked a sharp reversal from the hot reading in December, revamping hopes of disinflation in the Canadian economy and strengthening the case for more accommodation from the BoC as it attends to increasing growth concerns.
Elsewhere, the minutes of the Reserve Bank of Australia’s recent meeting indicated that the central bank remains inclined towards hiking interest rates further as it is not sufficiently confident that inflation is on track to return to its target range within the next couple of years.
The net result of the above from a US market perspective has been a rally in rates complex with yields on the 2 Y and 10Y notes lower by 5bps and 3bps respectively. Total Fed cuts priced for 2024 increased from 3.5 cuts to 3.75 cuts of 25bps each.
On the micro front, in its recent earnings report, Walmart observed a nuanced picture in its U.S. operations. The company's general merchandise category has reached a "deflationary position," although the rate of price decline has moderated in the three months leading up to January. While general merchandise prices are lower than last year, the decrease isn't as steep as previously projected at the end of the last quarter. In contrast, prices for food and consumables are slightly higher compared to a year ago.
In addition to these inflationary trends, Walmart's forecasts for first-quarter and full-year 2024 sales are slightly above expectations, indicating a modestly positive outlook on consumer strength. However, the company also highlighted that the uptick in general merchandise sales is predominantly driven by higher-income households, suggesting a bifurcation in consumer spending patterns. WMT’s stock is trading 3.6% higher as the piece goes to press.
In China, the PBOC cut the benchmark five-year loan prime rate (LPR), the peg for most mortgages, by 25bps to 3.95%, marking its first cut since June, and more than expected. They kept the one-year LPR, the peg for most household and corporate loans, unchanged at 3.45%. There wasn’t a strong market reaction as the economy needs more fiscal stimulus for its people to gain confidence in the property sector, rather than monetary support due to low demand for debt in the region.
Other news:
Today's cuts should allow more cities to reduce minimum mortgage rates BBG
Foreign direct investment into China slumps to worst in 30 years BBG
"The Year of Cash wasn't a flash in the pan." BBG
Markets Start to Speculate If the Next Fed Move Is Up, Not Down BBG
Fears of a systemic credit event are growing among fund managers BBG
Retirements spike again as stock market booms Axios
The combined market capitalization of the so-called Magnificent 7 would make it the second-largest country stock exchange in the world CNBC
Data show the US economy is booming. Wall Street thinks otherwise WSJ
In 2030 you may be driving a desk, literally WSJ
How companies are starting to use generative AI to improve their businesses WSJ
Saudi Arabia: "It’s mind-boggling the amount of stuff that’s trying to be done here" WSJ
Bad property debt exceeds reserves at the largest US banks FT
Investors shun the riskiest US corporate bonds on default fears FT
Investors plow record amounts into US farmland FT
Natural Gas prices plunge as surging production and lower demand (US set for warmest winter on record) weigh FT
Year of the Dragon opens on a high note for China's economy FT
For Michigan, EV's are either a blessing or a job killer NYT
China's securities watchdog solicits proposals to revive markets RTRS
Chinese scholar warns of the 'most significant crisis of our time' SCMP
Are Lithium stocks so bad, they're good? WSJ
China cut the 5-year Loan Prime Rate (LPR) by 2.5bp to 3.95% from 4.20% in February, the first cut since August and the most on record. The 1-year LPR held at 3.45%. WSJ