Hard to Justify a Cut

A stronger-than-expected retail sales data from the US cemented the idea that the US economy remains too strong for the Federal Reserve (Fed) to cut the rates in summer. Retail sales jumped 0.7% in March on a monthly basis, more than 4% on a yearly basis, the 3 and 6-month bill auctions were weak, and Atlanta Fed’s GDPNow forecast rebounded to 2.8%. Not bad.

Then, China posted a surprisingly stronger-than-expected GDP number this morning, showing that the Chinese economy grew 5.3% in the first quarter, comfortably higher than a 4.8% growth penciled in by analysts. But the sky is not blue in China. The industrial production missed estimates, house prices continue to fall and consumer spending slowed significantly during March, hinting that the underlying problems – like property crisis and weak consumer confidence – are not going away. Remember, Fitch cut the country’s outlook to negative last week citing risks to public finances, while in contrast Goldman and Morgan Stanley raised their outlook for the country’s economic growth pointing at improved factory activity and recovery in exports. But the EU started a deluge of investigations on China that could hurt the country’s export outlook, along with the risk of seeing Donald Trump become the next US president. The contradictory expectations and mixed data explained why the CSI 300 slid despite a 5.3% GDP growth. Shanghai’s Composite fell almost 1.5%.

A strong Chinese GDP may have not boosted appetite for Chinese stocks, but it sure boosts worries that rising Chinese growth – regardless of where growth comes from – will fuel global inflation and make major central banks think twice about their rate cutting plans. While the European Central Bank (ECB) and the Bank of England (BoE) are seen cutting the rates between summer and fall respectively, the outlook becomes complicated for the US. Provided that the economic growth and jobs market remain robust and inflation is heating up, the idea that the Fed’s next move will be a rate hike starts cooking in many investors’ minds. UBS now thinks that the Fed could increase borrowing costs to 6.5% next year to combat inflation. The fading Fed cut expectations continue to pressure the treasury market. The US 2-year yield is preparing to jump sustainably above the 5% level, the 10-year yield advanced past the 4.60% and the US dollar index extends gains. The EURUSD is trading a touch below the 1.0615 this morning with euro bears eyeing a further decline to 1.05 level, while the USDJPY spiked above 154 – the unthinkable at the start of the year – as the yen bears defy the Japanese authorities intervention threats and T. Rowe Price calls for another 10% slide in the Japanese yen.

In equities, the S&P500 had a bad start to the week with a 1.20% decline, as technology stocks led losses. Nasdaq fell 1.65%. Both the indices slipped below their 50-DMA following yesterday’s selloff. While strong economic data is not necessarily bad news for company earnings – as consumers continue to spend – the rising inflation, the fading dovish Fed expectations, and the latest optimism regarding earnings expectations could limit the upside potential in major stock indices, if company results fail to beat high expectations. The fear sets in and the VIX index rises rapidly.


Goldman Sachs surprised in the Q1 with a 28% jump in profit, but JPM and Wells Fargo’s first quarter results didn’t enchant investors. BoFA and Morgan Stanley will release their quarterly results in the coming hours. BoFA may announce a narrowing net interest margin, as did JPM and Wells Fargo, while Morgan Stanley is expected to post its 9th consecutive quarterly drop in earnings. Later this week, Netflix will begin the dance for the major tech earnings, Tesla is due to reveal its Q1 results next week.

Tesla said that it will cut 10% of its workforce globally to adjust to slowing EV demand. In fact, the company has had a bad quarter, deliveries fell 8.5% while the global EV sales increased less than 3%. Tesla lost market share despite cutting the prices of its electric cars. Losing market share despite lowering prices calls for immediate action to increase profitability. Price increases and cost cutting are the first aid measures that should soothe investors’ nerves, while bringing forward new revenue streams like robotaxis should keep investors dreaming for a bright future. Yet, the context of slowing EV growth and rising competition will likely continue to weigh on profits, and robotaxis are a niche and a slowly growing segment which won’t show in the bottom line in the immediate future. Therefore, Tesla – which has a PE ratio of nearly 62, has room to extend losses to settle at a more reasonable valuation. A slide toward the 100 is possible.

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