Trail 137 — On the Fence
Markets Update by Aashish Singh
Business Update by Sylvia Lo
Financial markets are fascinating. They are constantly evolving, they follow no predetermined path and much like humans, their behaviour at times is completely irrational. Every day their movements are thoroughly analysed, yet their next steps are a complete mystery. They follow a random walk and therein lies their beauty. Each week I briefly recap a few stories that captured my interest.
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A week that lacked much conviction in market direction ultimately saw renewed hopes for rate cuts by year end, trumping inflationary concerns. We saw more evidence of the US labour market cooling (highest jobless claims in 8 months) that prompted market participants to bias towards two rate cuts by year end (implied from swap pricing), up from one.
The Fed’s mandate is first and foremost price stability. Growth isn’t a Fed objective but rather avoiding contraction, even then it is a secondary measure. Over the last few decades however, the Fed has driven to the secondary objective and finally is facing its toughest test to pivot back to its primary objective, especially in an election year. I do not see the Fed achieving its price stability objective nor do I see it cutting rates. They’ll likely sit on the fence on this one.
When is the true reckoning for the US economy then? Probably in mid-2025. Earnings optimism is still strong, and the economy will continue to remain strong but so will inflation and high rates. The make-or-break point is when across households and corporate America, the debt reprices and the true test of strength takes place. Until then I see the market in sideways action, with massive downside risk driven by geopolitical tensions.
US support for Israeli assault in Rafah was taken off the table this week but that doesn’t mean Israel will back off. It’s a very delicate situation and for Israel to achieve its objective to eliminate Hamas, it will risk significant collateral damage in terms of civilians. Peace in the region will remain elusive for a while longer.
Meanwhile, Gold closed above $2,350 amidst renewed Fed rate-cut hopes and a weakening US dollar. Oil was range bound between $82–84. Cross asset volatility is down closer to its multiyear lows. China’s Politburo meeting saw Beijing commit further economic stimulus to support the faltering property sector and hopes of more rate cuts emerge. In the week ahead, several data points are due including CPI in the US, industrial output, property investment in China and labour market data in the UK.
Wall of Debt
US small-cap stocks are as cheap as they’ve been in decades, but with more than half-trillion-dollars of debt looming over the next five years, it’s going to take a significant risk-on signal from the Federal Reserve to entice investors.
Firms in the small-capitalisation Russell 2000 Index hold a total of $832 billion in debt, 75% of which — or $620 billion — needs to be refinanced through 2029, data compiled by Bloomberg shows. For comparison, companies in the big-cap S&P 500 Index have just 50% of their obligations due by then.
Earnings Optimism
Analysts are ratcheting up earnings forecasts for the current quarter at the swiftest pace in two years, suggesting that the worst of Corporate America’s profit slump may be firmly in the rear-view mirror. With nearly 90% of S&P 500 Index companies having reported for this earnings season, upbeat first-quarter results have pushed Wall Street to boost profit projections for the three months through June.
Minimal Relief
Underlying US inflation probably moderated in April for the first time in six months, offering a ray of hope that price pressures will start to ease again after a string of upside surprises. The core consumer price index, which excludes food and fuel, is seen rising 0.3% from a month earlier after 0.4% advances throughout the first quarter. The Bureau of Labour Statistics will issue its CPI report on Wednesday.
In The World of Business
This week, TikTok announces plans to automatically label AI-generated content using Content Credentials, a transparency standard, aiming to provide users with metadata about the origin and creation of such content. A venture capital insider critiques Google for over hiring employees, suggesting this practice hinders innovation and shareholder returns.
Sweden’s central bank governor warns that Europe needs to address its lagging productivity growth compared to the U.S., highlighting the importance of improving output per worker to enhance quality of life and economic competitiveness.
Content Transparency
In a ground-breaking move for social media transparency, TikTok has announced its commitment to automatically label AI-generated content uploaded to its platform. The initiative utilising Content Credentials, led by the Coalition for Content Provenance and Authenticity (C2PA), sets a new standard for transparency in the digital content landscape. TikTok’s decision follows similar moves by Meta (formerly Facebook) and YouTube but stands out as the first comprehensive effort to label AI-generated content across a major social media platform. With the rise of sophisticated AI-generated imagery, such as deepfake videos and realistic photos, the need for transparency and accountability in content creation has never been more pressing.
While the labelling effort represents a significant step forward, challenges remain, including the identification of AI-generated content uploaded from external sources and potential security vulnerabilities. However, TikTok is committed to addressing these issues through collaboration with industry experts and ongoing media literacy campaigns. By prioritising transparency and user education, TikTok is setting a precedent for responsible content governance in the digital age.
Big Tech Efficiency
Google finds itself under scrutiny as allegations emerge that half of its white-collar workforce may not be engaged in meaningful work. Silicon Valley insiders and venture capitalists suggest that large tech companies, including Google, over hire talent, leading to a bloated headcount that hinders innovation and detracts from shareholder returns.
David Ulevitch, a general partner at venture capital firm Andreessen Horowitz, criticises what he calls “BS jobs” at Google, arguing that billions of dollars spent on projects that yield no tangible results could have been redirected to benefit shareholders and retirement programs. However, Google’s recent ventures, such as its AI model Gemini and DeepMind’s achievements, indicate ongoing efforts to innovate and advance. Despite Ulevitch’s concerns, Google’s parent company, Alphabet, continues to see strong performance on Wall Street, with shares up significantly over the past year.
Europe’s Productivity Gap
Sweden’s central bank governor, Erik Thedéen, sounds the alarm on Europe’s lagging productivity growth compared to the U.S., urging policymakers to address this critical issue for economic competitiveness. With U.S. productivity outpacing Europe’s, Thedéen underscores the importance of closing this gap to foster wage growth and enhance quality of life.
While productivity is traditionally measured as output per worker, Europe’s performance falls short of the U.S., with GDP per hour worked rising by 56% in America since 1995 compared to 40% in the European Union. This disparity extends to countries like the U.K., which grapples with slower productivity growth since the 2007/08 financial crisis, impacting its economic trajectory. Efforts to bridge the gap require addressing financial and administrative barriers to entrepreneurship and fostering a culture that embraces innovation and risk-taking, echoing calls for a collective push toward greater economic dynamism in Europe.
Until next week.
