Double, double toil and trouble: Fire burn, and cauldron bubble

What an eventful week; many household names reported earnings, with diverse reactions from investors, Q1 GDP for the US economy and inflation data that continues to suggest the Fed is not getting things going their way. The troubles of Boeing continue as S&P cut its credit rating to a notch above junk. As bears ran to cover their shorts, Tesla’s share price may have jumped after hours. Still, a negative cash burn of 2.5 billion dollars in the quarter and the news that they will try to compete at the cheap end of the electric car market goes a long way to explaining why the shareholders have not done well this year. To top it all off, BHP announced they are making an all-share offer for Anglo American in the largest UK corporate deal this year. US stocks fell yesterday, but the S&P 500 remains above 5000.

Alphabet and Microsoft’s earnings were taken well by the market, as both share prices rose in after-hours trading. The investment in AI continued to boost earnings. As a result, Alphabet announced its first shareholder dividend and the intention to buy back 70 billion dollars of stock. Meta did not do so well, as shares fell after the company indicated it was investing more than the market expected in new technologies. Investors are a fickle bunch. Those whose investment strategy evolves around the Mag 7, Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia and Tesla will still have done relatively well this year but will be driven by an even narrower selection of names. It is noteworthy that according to a BCA chart, globally, equally weighted stock prices in USD are only slightly higher than they were at the start of 2021.

On the macro front, further evidence is that the US economy is slowing as the world’s largest economy grew by 1.6% in the first quarter, healthy enough compared to many developed economies currently but below expectations in Q4 2023 and the slowest in 2 years. Bond yields rose again as the inflation data embedded in the GDP report spooked bond markets. GDP prices were up over 3% in the first quarter, with personal consumption prices at 3.7%. Later today, the Personal and Consumption Expenditure Index will be released for March. Economists expect an increase of 0.3% and a year-over-year increase of 2.6%. Speculators are starting to rule out a cut in US  interest rates before December this year, so there is no summer cut. Today’s PCE report will add further to the debate. I stick with the one in June and the one in December view. Then things get spicier at the start of next year. As we said earlier this week, the slower growth scenario with sticky prices is a tasteless cocktail for Federal Reserve members. Uttering stagflation to a central banker is equivalent to Macbeth to an actor.