Markets to Watch This Week: Could AI Manifest a New Bull Market?

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Market Moves Over the Past Week

Nvidia (NVDA) stole the show last week, surging 24.6% after providing better-than-expected guidance on the impact of AI on its revenues. Meanwhile, the broader Philadelphia Semiconductor Index (SOX) rose by almost 11%. The impact on NVDA’s bottom line is material. Its next 12-month (NTM) P/E compressed by 15 points after the earnings announcement. NVDA now trades at a 47x multiple – still punchy (Chart 2)!

UK inflation surpassed expectations. Core at 6.8% Y/Y and services at 6.9% Y/Y both provided a strong hawkish surprise. The breadth of inflation remained strong as the net effect of the surprises in transport and recreation more than offset housing’s decline. In reaction to the print, the market violently repriced BoE terminal rate expectations higher – now almost 5.5%. This resulted in the 2Y Gilt yield rising by more than 50bps (Chart 3).

The Fed acknowledges more work to do on inflation. The latest FOMC minutes came out on Wednesday. Here are our two key extracts from the minutes:

• ‘Participants expected that a period of below-trend growth in real GDP and some softening in labor market conditions would be needed to reduce inflationary pressures over time.’
• ‘Almost all participants stated that, with inflation still well above the Committee’s longer run goal and the labor market remaining tight, upside risks to the inflation outlook remained a key factor shaping the policy outlook.’

After the UK, US rates saw the largest moves, with 2Y yields rising by almost 30bps last week. The rise in yields continues to support USD/JPY, with rate differences the main driver, while the BoJ keeps YCC unchanged (Chart 4).

Turning to Europe…Phillip Lane gave a presentation on Friday examining how long it could take for European inflation to return to its target. Meanwhile, flash PMIs indicated that growth could be peaking in the near term as manufacturing activity continues to deteriorate. The Manufacturing PMI came out at 44.6 vs. 45.8 previously. European equity markets struggled on the week after a strong 2023 so far, with the Euro Stoxx 50 down 1% and the German DAX falling by 2%.

Swedish unemployment surprised to the downside. Swedish unemployment at 7.1% SA came out stronger than markets expected (7.3%) and the Riksbank had forecasted (7.5% average through Q2). While this is perhaps ill-fitting with the Riksbank’s recent paring of hawkishness, Ben is content with expecting a 25bp hike in June, not 50bp.

What to Watch

Data-heavy week in the US with NFP taking centre stage. Dominique believes that the consensus forecast around 200,000 seems reasonable and high enough to support a Fed hike in June or July. She will be looking for a positive surprise in wages relative to the consensus of 0.3% as the very tight labour market suggests April’s 0.5% was not entirely noise. Outside NFP, we also get ISM Manufacturing on Thursday which should show manufacturing activity still struggling.

UK inflation surprised to the upside; will we see the same in Europe? Eurozone preliminary May inflation on Thursday will be the highlight in Europe. The market is looking for a hefty drop in the headline Y/Y reading to 6.3% (from 7.0% previously) and a smaller drop in the core rate to 5.5% (from 5.6%). The latter is currently more important. 5.5% core inflation would constitute a deceleration, but remain a strong m/m overshoot versus typical, and consequently add another nail in the coffin of the ECB’s near-term core inflation expectations.

An update on global manufacturing PMIs. China’s PMI will be key to watch with the official figures for manufacturing and services out on Wednesday. USD/CNH rose 0.7% last week. With commodity prices and Chinese stocks under pressure, could the market be pricing in further action from the PBOC?

This week,Dominique and Andrew continue their focus on the debt ceiling and discuss the potential wider impact on the economy. Dominique also provides an update of her thoughts on ‘hyper-core’ inflation, i.e., core services ex. housing, and the chances of a hike in June.

In case you missed it! We held an emergency webinar with Head of Research Bilal Hafeez and Senior Researcher Dominique Dwor-Frecaut, to discuss the potential impact of the US debt ceiling crisis.

Viresh Kanabar has worked in the UK financial services industry for over 8 years including in Consulting and Investment Risk. Most recently he launched The Macro Journal Substack where he puts out regular in-depth reports covering all areas of global macro.

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

Photo Credit: depositphotos.com

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