New Bubble or Market Top ?

MAXIN ADVISORS Weekly Market Review adresses the issues of the moment and our views for the markets ahead.

Today’s fascination with all things AI has most of the trappings of a financial bubble and, indeed, this bubble seems to have a lot in common with the dot.com bubble, which helped finance the internet backbone, sending stocks like Cisco and Intel to the roof in 1999.

Bubbles occur when the market value of assets decouple from their intrinsic value and expectations of rising valuations generate investor demand. In typical bubbles, both the volume and valuation of investments expand rapidly. We are seeing both trends in AI, especially in NVIDIA which shot up 24 % last week when reporting better than expected results but still declining sales and earnings when compared to the previous year. But the strong guidance from its CEO and CFO send the stock moon shooting past its 2021 all-time high.

One of the best indicator that NVIDIA is in a bubble is the great specialist of growth stocks and a big fan of NVIDIA itself, Cathy Wood, having sold all its exposure to the company back in January on the grounds of fundamental overvaluation, missing out on a 160 % rally.

Ai is not new and Venture Capitalists have started funding AI start-ups as early as 2011 and very large companies such as Google, Tesla, Microsoft, Amazon or Meta have been investing for years in the technology to further their products and optimise sales, advertising or self-driving.

What triggered the nascent bubble was the launch of Chat GPT by OpenAI and Microsoft’s investment in the company in December 2022. Since then, the public at large discovered generative AI and it has garnered so much attention and money that Venture Capitalists already feel the budding sector will be the next investment bubble.

TechCrunch recently surveyed more than 35 investors working in different geographies, investment stages and sectors about how they were feeling about next year. One of the questions sought their prediction of where the next bubble would be, and almost half of those surveyed mentioned generative AI.

While several investors said they were bullish on the new tech overall, they also admitted that the sector was likely to get lost in its own hype.

AI is in a “baby bubble” for now, confirmed Bank of America on Friday saying that its fate could be stopped in its track by the FED resuming its tightening cycle on the back of stronger inflation and higher bond yields.

The Tehnological Debate

According to some experts, in a scathing essay in Salon, titled “AI Chatbots are having their Tulip mania Moment”, the frothy hype cycle surrounding chatbot AIs is doomed to be what investors fear most: a bubble.

Instead, like the predictive text feature on smartphones or in email programs, they just predict what words might come next in a sentence. Every prompt response is a probability equation, as opposed to a demonstration of any real understanding of the material at hand, a reality of the underlying machinery that leads to the phenomenon of AI hallucination — a very serious failure of the tech made even more complicated by the machines’ proclivity for sounding wildly confident, sometimes to the point of becoming combative, even when delivering incorrect answers.

A glaring example was Google’s recent massive mishap following their embarrassing AI advertising ordeal.

When the bubble pops, they argue, it will reveal Large Language Model (LLM) -powered systems to be much less paradigm-shifting technologies than investors believe at the moment.

“The undeniable magic of the human-like conversations generated by GPT,” write Gary N. Smith, the Fletcher Jones Professor of Economics at Pomona College, and Jeffrey Lee Funk, an independent technology consultant, “will undoubtedly enrich many who peddle the false narrative that computers are now smarter than us and can be trusted to make decisions for us.”

The experts’ conclusions are rooted in the argument that a lot of investors simply just seem to fundamentally misunderstand the underlying technology behind the easily anthropomorphized language models. While the bots, particularly ChatGPT and the OpenAI-powered Bing Search, do sound impressively human, they’re not actually synthesizing information, and thus fail to provide thoughtful, analytical, or usually even correct answers in return.

Trained on unimaginable amounts of text, they string together words in coherent sentences based on statistical probability of words following other words,” Smith and Funk explain. “But they are not ‘intelligent’ in any real way — they are just automated calculators that spit out words.”

Training them on even larger databases will not solve the inherent problem: LLMs are unreliable because they do not know what words mean. ” the economists argue. “In fact,”‘ they add, “training on future databases that increasingly include the very results spouted by LLMs will make them even less trustworthy.”

In other words: if, as many other experts fear, incorrect or otherwise misleading or harmful chatbot-made content starts to clog up the internet, robots like ChatGPT and Bing Search will have an increasingly difficult time sorting through what’s real and what isn’t. Trustworthy information will be fewer and further between than ever, and in a way, the internet will become an imitation of itself.

AI optimists, on the other hand, are writing off the burgeoning tech’s sometimes funny, sometimes genuinely horrifying quips and errors as growing pains. They often argue that more data, which includes the free data granted to the machines by way of public use, will be the solution to the chatbots’ fact-checking woes.

What the whole debate means in reality is that the future of the technology and its wide application are not yet a certainty, even if there are areas such as coding, editorial content or medical diagnoses – see smoke and mirrors– where productivity gains may already be palpable.

Maybe the AI optimists are right, or maybe investors’ perceptions of what the technology really is are misplaced, only the future will tell, but for now a lot of powerful people and companies have and are continuing to pour money in the development of LLMs and other generative AI technologies.

Similarities with the dot.com bubble

On Friday, in a note to investors Bank of America confirmed that AI was in a” Baby Bubble.

Similarities with the 2000 dot.com bubble are obvious with the dream for a new paradigm and game-changing productivity gains in many industries, as was the case with the narrative of the Dotcom era.

What is very different today, is the very narrow nature of the AI bubble as it is limited to a very small number of companies that are already well-established and leaders in their fields rather than being start-ups. NVIDIA added 198 Bln of Market Capitalisation overnight, the most ever in the US stock market history, and the equivalent of te total market cap of 427 companies in the SP500, from an already high market cap, taking it close to the USD 1 trillion market cap.

Some other companies such as Marvel Technologies have seen their stock prices pop as well, but the other big players in the area such as Microsoft, AMD, Google, META or Amazon have had relatively muted reactions for now, leaving a only a very few stocks in bubble territory.

NVIDIA is not a promising profitless start up entering a new sphere, it is an industrial company operating in a highly cyclical industry with tremendous competition, a dangerous reliance on Taiwan’s manufacturer for its products and 30 % of its sales in China where the US Aministration’s confrontational policies could cut it off form both manufacturing and a sizeable market for its products.

Will NVIDIA end up delivering the revenues and profits factored in its stratospheric valuation ?
We, as many other analysts and Cathy Wood herself, already made the case of its extreme overvaluation even with the stock 50 % and 25 % lower than it trades at today.

But for now, Analysts have jacked up their target prices to USD 450, another 17 % higher than current levels, and the stock is highly over-extended with a massive gap underneath.

We were expecting good results to come out this quarter, and they indeed came out better than analysts expectations with an 18 % positive surprise on earnings and a 10 % beat on revenues. Still, earnings came out 20 % lower than the same quarter of last year and revenues -13 % lower year on year, not really the stuff to send the stock 25 % higher overnight, especially after a 300 % rise in the stock price over the past 8 months.

NVIDIA closed on Friday at USD 389, with a book value per share of USD 10 and annual earnings of USD 2 per annum. At 189x current earnings, 152 x Enterprise Value over current EBIDT and 188x Free cash flow, a tremendous amount of growth is factored in.

A current valuations, NVIDIA will have to deliver 30 % CAGR in earnings for the next 10 years to reach the 10 year average P/E ratio of the Nasdaq Index, without its stock price moving an inch higher.

That is a lot of positive news factored in considering the still unknown potential of the technology, the cyclicality of the industry, the existence of powerful competitors and its specific risks related to China and Taiwan.

It is therefore clearly in an investment bubble and the question is whether it has reached its pinnacle or not yet.

But leaving aside the specific case of NVIDIA, the most important question is whether the AI bubble marks the top of the powerful bear market rally that has started in October 2022.

Every bull market phase ends with some kind of melt-up phase in a some areas of the market.
The AI bubble may be exactly that.

What is striking at the moment is that the breadth of the recent rally has been declining steadily over the past few weeks with a declining number of mega caps keeping the indexes at elevated levels while the rest of the market is weak if not in outright bear trends.

Last week, despite the massive pop in AI related stocks, the SP500 index rose by a paltry 0.32 %, barely closing above 4200 and failing to make a significant push above this massive resistance level.

The Dow Jones Industrial Index fell by -1 %.and the mid and small caps Russell 2000 Index ended the week down -0.3 %, with a historical milestone of its entire 2000 companies being worth less than Apple Inc.’s market capitalisation alone.

The extremely low market participation in this last phase of the rally is a worrisome development.
This exceptional dispersion and weakening breadth is leaving the whole market in a dangerous situation if those high flying and highly overextended mega caps turn, considering the size of indexation and the heavy hold of CTA’s on US equity markets.

Last week’s melt-up in AI stocks coupled with the extremely over-extended technical posture and loss of upward momentum of the leading stocks such as AAPL, MSFT, GOOGL, META or AMZN could actually constitute the last speculative push that usually marks the end of any bull phase.

The dot-com blow-up in the early 2000s had its roots in the Fed restarting policy tightening in 1999 as highlighted by Bank of America in their Friday’s report.

In the past few weeks, equity markets have been totally disconnected from what usually constitutes an important indicator for the direction of equity markets.

At a time where the AI craze was unfolding, bond markets have been selling off with US 10-year Government bond yields rising from 3.33 % a few weeks ago to 3.80 %, a 14 % increase, and trading at a very significant technical level that could see them rise to 4.5 % or even 5.5 % if that level was to be breached.

At the same time, the US core CPI deflator, the preferred measure of inflation of the FED has ticked up again rising to 4.7 % instead of 4.6 % expected by economists, leading to a change of perception on the next course of action by the Fed and the increasing risks of another rate hike in June.

Inflation is not dead yet and although we have early signs of weakening global economies as seen in the latest data coming out of Germany and Europe, monetary tightening may not be over just yet.

In his latest address to shareholders, Jamie Dimon warned that rates and bond yields may have to rise significantly higher in the year(s) to come and potentially reach levels of 6 to 7 %, something that would constitute a considerable headwind for equity valuations and equity markets at large.

Finally, and in a significant development last month, High Yield bond yields have broken out to the upside from their already elevated 8.80 % level, confirming the increasing stress in credit markets and rise in bankruptcies that we have highlighted several times before. If this breakout is sustained, High Yields could start a new campaign that could see them rise to above 10 %, further hampering the access to capital of smaller companies and sharply increasing the cost of refinancing existing debt.

As always, when this kind of disconnect happens between bond markets and equity markets, something has to give and it is usually equity markets that end up following the lead of bond markets.

It has always been our roadmap that the US equity markets would start the second leg of their secular bear market at this very time of the release of the Q1 corporate earnings with last week seeing the last important releases.

It has also always been our macro base case that the next leg down would see the SP500 fall to between 2’800 and 3’200 by October / November 2023, a -29 % decline form current levels, as equity investors finally realise that the current stagflation environment is turning into an outright recession with inflation environment, and that hopes for a quick recovery in earnings are dashed.

Even taking the perceived as “safe and recession proof” Technology mega caps, the current 32.6x P/E ratio of the Nasdaq does not tie-up with the reported earnings and revenue growth rates of the first quarter ( Apple in negative for instance ) and with the challenging environment of the coming quarters. If luxury good companies are starting to see a sharp decline in sales in the US market, the likelihood of continuing weakness in sales of high-priced iPhone, iPods or Mac books is a real probability.

Regardless of what happens to the AI bubble and the potential for investors to push some stocks to ultimately unsustainable levels, we are now adding to our road map the increased possibility of a sudden and brutal crash in equities, either in June, but most probably around August / September 2023, that will not give investors any opportunity to bail out in time and may actually push our ultimate targets even lower.

In March, we were highlighting that the conditions for an equity crash were in place while putting a low probability on its occurrence. The recent shift of investors sentiment from bearishness to bullishness and the AI melt-up have just added the two missing pieces that make the probability of such a crash increase substantially.

Regardless of the outcome of the debt ceiling talks where we see a positive resolution on time as the most likely outcome, the lifting of the debt ceiling will only kick the debt can down the road but will in fact take an immediate toll on economic activity in the coming quarters by cutting Federal spending and cancelling the Student Loans holiday enacted during the COVID pandemic.

In 2011, the S&P500 fell by 11 % immediately after the debt ceiling was raised, for exactly the same reasons.

In conclusion, even if retail and institutional investors keep pushing the AI bubble higher in the immediate future, we expect US and European equities to fall sharply in the coming four months and this could well start as early as next week.

Investors should carefully watch Apple Inc as the bellwether indicator of the general market. It may make a last push towards it previous all-time high at 180 but any break below USD 170 would confirm that the top of the Q4 bear market is in place.

European Equity Markets have already peaked with the EUR, as we accurately predicted, and with Luxury stocks having ended their spectacular rise to extreme overvaluation.

MAXIN ADVISORS
Weekly Market Review 27 May 2023

Macro Highlights

US Core PCE Inflation Rises More Than Expected
The personal consumption expenditure prices in the US rose more than expected in April, reinforcing bets that the Federal Reserve will commit to its hawkish stance and leave rates elevated for a prolonged period. Core PCE, which excludes food and energy, increased 0.4 percent month-over-month in April 2023, above market expectations of a 0.3 percent gain. The annual rate, the Federal Reserve’s preferred gauge to measure inflation, unexpectedly accelerated to 4.7 percent, compared with market expectations of 4.6 percent. The headline PCE also increased 0.4% and was up 4.4% from a year ago, higher than the 4.2% rate in March.

US Corporate Profits Sink -6.8% in Q1
Corporate profits in the United States tumbled 6.8 percent to USD 2.307 trillion in the first quarter of 2023, the lowest since Q2 of 2021, much more than market expectations of a 0.9 percent decrease and following a 2.7 percent fall in the previous period, a preliminary estimate showed. It was the largest decrease in corporate profits since Q1 2020 when they slipped 7.4 percent. Net cash flow with inventory valuation adjustment, the internal funds available to corporations for investment, decreased 1.5 percent to USD 3.099 trillion and undistributed profits slumped 20.6 percent to USD 0.652 trillion while net dividends were unchanged at USD 1.655 trillion.

US GDP Growth Revised Higher to 1.3%
The US economy grew by an annualized 1.3% on quarter in Q1 2023, slightly higher than 1.1% in the advance estimate and market forecasts of 1.1%. Private inventory investment subtracted 2.1 pp from the GDP, slightly less than a 2.3 pp drag in the advance estimate. Also, consumer spending growth accelerated more than expected to 3.8% (vs 3.7% in the advance estimate) despite stubbornly high inflation. Upward revisions were also seen for nonresidential fixed investment growth (1.4% vs 0.7%) and public spending (5.2% vs 4.7%). On the other hand, residential fixed investment shrank at a faster pace (-5.4% vs -4.2% in the advance estimate). Net external demand has also contributed positively to the GDP as exports rose more than imports. Despite the upward revision, Q1 2023 GDP growth remains the weakest since Q2 2022.

US Mortgage Rates Rise to Over 2-Month High
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) in the US jumped by 12bps to 6.69% in the week ended May 19th, 2023, reaching the highest level since early March. Mortgage rates have been on the rise in recent weeks, mirroring the upward trend of the 10-year Treasury note yield as discussions regarding the increase of the US debt ceiling continue to stall.

Canada Government Budget Deficit Widens in March
Canada’s government budget deficit widened to CAD 44.4 billion in March 2023, from CAD 25.7 billion in the corresponding month of the previous year. Revenues decreased by $1.8 billion, or 4.5 percent, largely reflecting the one-time Grocery Rebate announced in Budget 2023. Program expenses excluding net actuarial losses were up $15.7 billion, or 25.3 percent, largely reflecting higher provisions for contingent liabilities and loans, and increased transfers to other levels of government. Public debt charges were up $1.3 billion, or 53.3 percent, reflecting higher interest rates. Net actuarial losses were down $0.1 billion, or 9.3 percent. The government posted a budgetary deficit of CAD 41.3 billion for the April to March period of the 2022-23 fiscal year, compared to a deficit of CAD 95.6 billion reported for the same period of 2021-22.

FDI Into Brazil Lowest in Over a Year
Foreign direct investment in Brazil totalled USD 3.31 billion in April 2023, marking the lowest amount since December 2021 and falling below market expectations of USD 4.20 billion. The net inflows of capital participation and net amortizations declined to USD 4.4 billion from USD 6.4 billion in the same month the previous year. Additionally, intercompany operations experienced outflows of USD 1.1 billion, contrasting with the inflows of USD 4.6 billion recorded during the same period. The FDI accumulated over the past 12 months amounted to USD 82.0 billion, equivalent to 4.17 percent of the country’s GDP, as of April 2023. This figure decreased from USD 89.7 billion, or 4.57 percent of GDP, in the previous month and rose significantly compared to USD 54.3 billion, which accounted for 3.12 percent of GDP, in April 2022.

Mexico Q1 GDP Revised Lower
The Mexican economy expanded by 1% quarter-on-quarter in the three months ending March of 2023, below preliminary estimates of a 1.1% advance and in line with market expectations. It was the sharpest expansion since the second quarter of 2022, underscoring the resilience of the Mexican economy from Banxico’s aggressive rate-hike cycle. Output expanded the most for services (1.5% vs 0.1% in Q4) as inflation slowed and consumer and business activity recovered while manufacturing production rose at a solid pace (0.6% vs 0.5%). On the other hand, the GDP contracted for primary activities (-2.8% vs 2%). On a yearly basis, the Mexican GDP expanded by 3.7% in the first quarter, below the 3.9% growth expected by the market and projected by preliminary data.

UK Inflation Rate Slows Less than Forecast
The consumer price inflation in the UK fell to 8.7% year-on-year in April 2023, the lowest since March 2022, due to a sharp slowdown in electricity and gas prices. Still, the inflation rate exceeded market expectations of 8.2% and remained well above the Bank of England’s target of 2.0%. Housing & utilities inflation dropped to 12.3% from 26.1% in March, with the cost for electricity, gas & other fuels increasing 24.3%, compared with 85.6% the month before. Prices have also advanced at a slower pace for restaurants & hotels (10.2% vs 11.3%) and furniture, household equipment & maintenance (7.5% vs 8.0%). Meanwhile, food & non-alcoholic beverages inflation remained close to March’s record high (19.0% vs 19.1%), while cost accelerated for transport (1.5% vs 0.8%), recreation & culture (6.3% vs 4.6%) and miscellaneous goods & services (6.8% vs 6.7%). The core rate, which excludes food and energy, jumped to 6.8%, the highest since March 1992 and above well forecasts of 6.2%.

UK Retail Sales Rebound in April
Retail sales volumes in the United Kingdom rose by 0.5 percent from a month earlier in April 2023, partially recovering from a 1.2 percent decline in March and exceeding market expectations of a 0.3 percent growth. Non-food stores saw a notable rebound, with sales rising by 1.0 percent, led by strong sales in watches and jewelery, and sports equipment. This followed a significant decline of 1.8 percent in March, primarily attributed to unfavorable weather conditions that negatively impacted sales during that period. Similarly, food stores trade was up by 0.7 percent, recovering from a 0.8 percent drop in the preceding month. The online retail sector also demonstrated resilience, recording a 0.2 percent increase in trade. However, fuel sales encountered a setback, declining by 2.2 percent despite the concurrent decrease in fuel prices. Retail trade rose by 0.8 percent in the three months to April 2023 when compared with the previous three months, the highest rate since August 2021.

German Economy Enters Recession
Germany’s economy contracted by 0.3% during the first quarter of 2023, as revised from the initial estimate of no growth. This revised figure indicated a second consecutive quarter of economic decline, plunging Europe’s largest economy into a recession, due to persistent high price increases and a surge in borrowing costs. Household consumption shrank by 1.2% as consumers reduced spending on various categories such as food & beverages, clothing & footwear, and furnishings. Additionally, there was a decline in the purchase of new cars, potentially influenced by the discontinuation of grants for plug-in hybrids and reduced grants for electric vehicles at the beginning of 2023. Government spending also saw a significant decline of 4.9%, while fixed investment showed a strong rebound of 3.0%, driven by construction and machinery & equipment. Finally, net exports contributed 0.7 percentage points to the GDP as exports increased and imports decreased.

German Business Morale Deteriorates in May
The Ifo Business Climate indicator for Germany dropped by 1.7 points from a month earlier to 91.7 in May 2023, down from the previous month’s 14-month high and falling short of market expectations of 93.0. It also marked the first monthly decline in the index since last October, amid a substantial deterioration in industry expectations and probably significantly fewer new orders as a result of the recent interest rate hikes and stubbornly high inflation. Expectations for the coming months were more pessimistic (88.6 vs 91.7 in April) and firms’ assessments of their current situation have also become slightly more negative (94.8 vs 95.1).

Spain Producer Prices Fall Most in 33 Months
Producer prices in Spain fell 4.5% year-on-year in April 2023, the most since July 2020 and following an upwardly revised 1.4% decrease in the previous month. Energy cost made the largest downward pressure and was down 20.5% (vs -16.7% in March). Excluding energy, the PPI rose 4.2%, after a 7.3% increase in March. A decline was also seen in prices for intermediate goods (-1.5% vs 3.5%) and cost slowed for consumer goods (10.8% vs 12.8%) and capital goods (3.6% vs 4.2%). Compared to the previous month, the PPI dropped 2%.

China Holds LPR Rate Steady for 9th Month
The People’s Bank of China (PBoC) maintained its key lending rates steady for the ninth straight month at the May fixing, as widely expected. The one-year loan prime rate (LPR), which is the medium-term lending facility used for corporate and household loans, was left unchanged at 3.65%; while the five-year rate, a reference for mortgages, was kept at 4.3%. The move came after the central bank held its medium-term policy rate at 2.75% last week. Also, the yuan weakened past the key threshold of 7 in both onshore and offshore trading after data showed factory output, retail sales, and fixed-asset investment all grew at a slower pace in April than economists forecast. At the same time, the yield gap between China’s benchmark 10-year government bonds and their US counterparts is hovering at the widest level in two months.

China Industrial Profits Drop 20.6% in Jan-April
Profits earned by China’s industrial firms dropped by 20.6% from a year earlier to CNY 2,032.88 billion in the first four months of 2023, amid a weakening economic recovery, feeble demand, and margin pressures. The decline followed a 21.4 % plunge in the prior period and a 4% fall in 2022, with profits shrinking in both state-owned firms (-17.9% vs -16.9% in Jan-March) and the private sector (-22.5% vs -23.0%). Among the 41 industries surveyed, 27 saw losses, namely ferrous metal smelting and rolling (-99.4%), petroleum, coal (-87.9%), chemical products (-57.3%), non-ferrous metal smelting and rolling (-55.1%), computer, communication, & electronic equipment (-53.2%), agricultural & food processing (-36.3%), textile (-30.2%), non-metallic mineral product (-27.4%), coal mining & washing industry (-14.6%), special equipment manufacturing (-7.4%), and oil & natural gas extraction industry (-6.0%).

Tokyo Core Inflation Slows More than Expected
The core consumer price index for the Ku-area of Tokyo in Japan rose 3.2% year-on-year in May 2023, slowing from a 3.5% gain in April and coming in below the consensus forecast of 3.3%. Still, Tokyo’s core inflation rate, a leading indicator for nationwide price trends, surpassed the Bank of Japan’s 2% target for the 12th consecutive month. This keeps the pressure on the central bank to adjust its ultra-loose monetary policy this year amid stubborn inflation and rising global interest rates. However, BOJ officials have repeatedly stated that they will maintain massive stimulus until recent cost-push inflation turns into one driven by strong demand, while achieving the 2% target in a sustainable manner.

Japan Manufacturing Sector Returns to Expansion
The Au Jibun Bank Japan Manufacturing PMI increased to an eight-month high of 50.8 in May 2023 from a final 49.5 in the previous month, flash data showed. It was the first expansion in the factory activity since last October, as the post-COVID recovery gained traction, with both new orders and output returning to expansion territory for the first time since last June, and the fastest pace in 13 months. Meanwhile, suppliers’ delivery times shortened for the first time since January 2020, albeit only fractionally. Employment growth eased, with backlogs of work increasing at a slower pace. On the pricing front, input cost inflation slowed to the softest since February 2021, while output cost inflation eased to a four-month low. Finally, business sentiment remained positive, despite easing from April, amid a broad improvement from reduced COVID-related disruptions and growing bets that inflationary pressures would peak soon and ease throughout the remainder of the year.

Hong Kong Inflation Rate Accelerates in April
The annual inflation rate in Hong Kong accelerated to 2.1% in April 2023, after steadying at 1.7% in the previous two months and was almost in line with market forecasts of 2%. Main upward pressures came from food (2.6% vs 1.6% in March), housing (0.5% vs -0.2%) and clothing & footwear (6.4% vs 6.3%). On the other hand, prices notably slowed for transport (2.2% vs 2.8%) and electricity & utilities (17.8% vs 19.9%). Meanwhile, the underlying inflation rate increased 1.8% year-on-year, slightly up from 1.7% in March. On a monthly basis, consumer prices rose 0.2%, the same pace as in the prior period.

Taiwan Retail Sales Growth Strongest in 4 Months
Retail sales in Taiwan rose to 7.5% year-on-year in April 2023, accelerating from a three-month high of 7.1% increase in the previous month. It was the strongest growth in retail activity since December 2022, mainly due to higher sales in textiles & clothing in specialized stores (29.37% vs 1.27% in March) and other retail sales in specialized stores (23.47% vs 13.88%). At the same time, sales rebounded for household appliances & goods in specialized stores (11.08% vs -0.94%) and cultural & recreation goods (4.9% vs -5.43%). Meanwhile, sales fell for food, beverages & tobacco (-2% vs 6.11%) and pharmaceutical & medical goods & cosmetics (-1.37% vs 5.6%), while slowed sharply for motor vehicles & motorcycles (11.26% vs 28.38%). On a monthly basis, retail trade declined 0.17% in April, shifting from an 11.9% increase in the previous month.

Macau Economy Grows for 1st Time in Over A Year
Macau’s economy expanded 38.8% year-on-year in Q1 of 2023, rebounding from a 23.4% contraction in the previous period. This was the highest growth rate since Q2 of 2021, and ending five consecutive quarter of economic contraction, with a significant rebound in exports of services (71.5% vs -27.1% in Q4). Consumer spending continued to contract (-7.5% vs -10.5%) while government spending jumped (30.1% vs 1.9%). At the same time, gross fixed capital formation fell less (-0.5% vs -13.9%). Regarding net foreign demand, exports of goods slumped much (-40.6 % vs -14.1%). Meantime, imports of goods dropped less (-6.9% vs -7.9%), whereas those of services (24% vs 12.6%) surged.

Russia Producer Prices Fall for 6th Month
Producer prices in Russia fell by 12.7 percent year-on-year in April 2023, the sixth consecutive decline and the fastest since May 2020 when the pandemic sent energy and commodity prices plummeting. Prices declined faster for mining and extractive industries (-33.1 percent vs -32.1 percent in March) and manufacturing (-8.3 percent vs -5.8 percent). On the other hand, cost accelerated for providers of electricity, gas, steam, and air conditioning (14.9 percent vs 14.3 percent) and water suppliers (11.5 percent vs 8.5 percent). On a monthly basis, producer prices rose 2.4 percent, following a 2.6 percent increase in March, driven by a rise in the cost of mineral extraction and oil products.

The Week Ahead

The US debt-ceiling negotiations continue to take center stage as the June 1st deadline set by the Treasury Department is approaching. Encouragingly, on Friday, the White House and congressional negotiators made progress toward a compromise agreement to raise the debt ceiling for a two-year period. The two sides were only $70 billion apart on a total discretionary spending figure of over $1 trillion. In the coming week, market participants will eagerly await the US labour market report, which will provide insights into the health of the jobs market ahead of the Federal Reserve’s June meeting. The US economy is expected to add 193,000 jobs in May, indicating a slowdown from the 253,000 jobs reported in April, while the jobless rate is set to rise slightly to 3.5%. Moreover, several important indicators, including April’s job openings and the ADP employment change for May, are due for publishing. Apart from that, the ISM Manufacturing PMI, S&P/Case-Shiller home prices, and regional activity indexes such as the Chicago PMI and the Dallas Fed Manufacturing Index will give further clues about the state of the economy. The final S&P Global Manufacturing PMI and first-quarter labor productivity readings will also come to attention.

Outside the United States, updated GDP figures from Canada and Brazil will be closely watched, along with Canada’s current account data, Brazil’s foreign trade figures, jobless rate, industrial output, and Mexico’s unemployment rate. Manufacturing PMI data from across the region will be monitored for any effect on the broader economic landscape.

In Europe, minutes from the ECB’s last monetary policy and flash CPI reports for the Eurozone, including Germany, France, Italy, and Spain, take the spotlight. The annual inflation rate in the Euro Area is anticipated to ease further to a 15-month low of 6.3% in May, compared to 7% in April. Additionally, retail sales in Germany are likely to rebound after three straight months of declines. Jobless data will also be revealed for the Euro Area, Germany, Spain, and Italy. Business surveys for the Euro Area will be published, along with first-quarter GDP updates for France, Italy, Switzerland, and Turkey. Finally, investors will keep an eye on the Euro Area business survey and final manufacturing PMIs, as well as the United Kingdom’s final manufacturing PMI, Nationwide housing prices, and the Bank of England’s monetary indicators.

In China, official NBS PMIs and the Caixin manufacturing PMI will provide an update on the economic recovery in May. In Japan, a batch of economic data, including retail sales, industrial production, consumer confidence, unemployment rate, housing starts, and final manufacturing PMI will be divulged. In India, GDP growth figures for Q1 will probably show an annual expansion of 5%, above 4.4% in Q4 2022, boosted by services exports, private consumption, and manufacturing amid easing input cost pressures. In Australia, the Monthly CPI Indicator is likely to show price pressures remained elevated in May. Other significant data covers building permits, home loans, private capital expenditure, construction work done, and private sector credit. Elsewhere in the Asia-Pacific region, the Bank of Thailand is set to raise interest rates by another 25bps. It will also be interesting to follow trade data from Thailand, Hong Kong, and South Korea; several manufacturing PMIs for the Philippines, Malaysia, Taiwan, and Vietnam; inflation rate and final GDP numbers for South Korea.

Inflation

Bonds

USA

US 2 Year Government Bond Yield

US 10-Year Yield Bounces Back to Over 2-Month High
The yield on the US 10-year Treasury note climbed above 3.83%, reaching its highest level since March 9, prompted by stronger-than-expected personal consumption expenditures data, which raised expectations of additional tightening by the Federal Reserve. The core PCE inflation, the Fed’s preferred inflation gauge, rose to 4.7% in April, surpassing expectations of 4.6%. Also, personal spending rose more than expected, and durable goods orders unexpectedly increased. Meanwhile, investors are eagerly awaiting updates on the ongoing debt ceiling negotiations. A deal between Republican and White House negotiators is nearing completion, according to some sources, further adding to the volatility in the market.

US 30 Year Government Bond Yield

Europe

German 10-Year Bond Yield at 1-Month High
Germany’s 10-year government bond yield persistently rose above 2.4%, reaching its highest level since April 24. The surge was triggered by robust inflation data from the UK, which served as a reminder to investors that the global battle against rising prices is ongoing. Furthermore, the recently released minutes from the Federal Reserve’s latest meeting revealed a division among policymakers regarding the necessity of further interest rate hikes. In Europe, the European Central Bank is anticipated to continue its efforts to tighten monetary policy in response to concerns about inflation, even amidst worries about potential consequences on the financial system resulting from a rapid succession of interest rate increases.

UK 10-Year Bond Yield Rises Further to New 7-Month High
The yield on the UK’s 10-year Gilt has extended gains above the 4.3% level and reached its highest point since October 2022, as the latest CPI figures from the UK pointed to sticky inflation and raised expectations of further policy tightening by the Bank of England. Britain’s inflation dropped to 8.7% in April, but the rate remained significantly higher than both the market forecasts of 8.2% and the Bank of England’s target rate of 2%. Furthermore, the core inflation rate surged to its highest level in 31 years. Governor Andrew Bailey recently acknowledged that if inflationary pressures persisted, additional tightening of monetary policy might be necessary. The Bank of England has raised its key rate by 25 basis points to 4.5% in May, marking the highest borrowing costs since 2008.

French 10Y Bond Yield Remains Above 3%
The yield on the French 10-year OAT continued its upward trajectory, surpassing the significant 3.0% threshold and remaining near its highest level since April 24. Hotter-than-expected CPI data from the UK served as a reminder to investors of the persistent nature of inflation and the potential need for central banks to maintain elevated interest rates for an extended period. Yields have been bolstered in recent times by signals from the European Central Bank, which have indicated the potential for future interest rate hikes. Elsewhere, investors have analyzed the minutes from the most recent Federal Reserve meeting, revealing a division among US officials regarding the necessity of further policy tightening.

Italy 10-Year Yield Remains Close to 1-Month High
Italy’s 10-year yield remained persistently above the 4.3% threshold, maintaining its position near a four-week high of 4.376% recorded on May 24, as robust CPI data from the UK indicated the presence of sticky inflation and raised concerns about the prolonged necessity of elevated interest rates by major central banks. Adding to the market dynamics, several European Central Bank policymakers have recently reiterated their commitment to combat inflation, suggesting a probable continuation of rate hikes throughout the year. The release of the Federal Reserve meeting minutes further contributed to the market sentiment as it revealed a divided stance among US policymakers regarding the future need for additional interest rate increases. Lastly, rating agency Moody’s affirmed Italy’s rating at Baa1 with a negative outlook, aligning with market expectations.

Asia

Currencies

Dollar Heads for Third Straight Weekly Gain
The dollar index held near two-month highs above 104 on Friday and was headed for its third straight weekly advance, lifted by growing expectations that US interest rates could stay elevated for longer than previously anticipated. The most recent PCE inflation data exceeded market expectations, leading to speculations that the Federal Reserve will maintain its hawkish stance and keep rates elevated for an extended period. Moreover, personal spending rose more than expected, and durable goods orders unexpectedly increased. Meanwhile, it looked like the White House and Republicans narrowed the differences and it is likely that the debt deal will be concluded before the deadline.

Euro Hits 9-week Low
The euro hit a 9-week low of $1.0706 on general dollar strength as expectations increased that the US Federal Reserve will deliver another rate hike and keep the rates higher for longer. US consumer spending grew more than expected boosting Q2 growth prospects while the PCE inflation surprised on the upside. Meanwhile, the White House and Republicans were moving closer to an agreement to raise the debt limit and cap federal spending for two years. The Euro weakness persisted despite the European Central Bank’s pledge to proceed with interest rate hikes throughout the year. Klaas Knot, the chief of the Dutch Central Bank, recently expressed the view that the ECB should implement at least two additional 25-basis-point interest rate hikes and considered market expectations of rate cuts in early 2024 overly optimistic.

Japanese Yen Crosses $140
The Japanese fell beyond 140 per dollar, its lowest level in six months amid widening monetary policy divergence between Japan and the US. The Bank of Japan has maintained its policy of ultra-low interest rates despite market pressure and persistent inflation. The headline inflation rate in Japan unexpectedly accelerated to 3.5% in April despite forecasts for a further slowdown to 2.5%, while the core inflation rate rose to a three-month high of 3.4%. On the other hand, the expectations are growing that the Federal Reserve will deliver another rate hike and keep rates elevated for an extended period. The most recent PCE inflation data surprised on the upside while personal spending rose more than expected. Still, Japanese Finance Minister Shunichi Suzuki said that currency rates should be set by markets based on economic fundamentals while adding that the government will watch market moves closely.

Crypto Currencies

Equities

World Indexes

USA

US Stocks Surge, Tech Rally Continues
US equities surged on hopes of a debt ceiling deal, with Dow Jones up 329 points and S&P 500 rising 1.3%. Nasdaq Composite jumped 2.2%, driven by Marvell’s 32% spike after strong revenue projections due to AI technologies, in line with Nvidia on Thursday. Treasury Secretary Yellen announced the department expects to be able to make payments on US debts up until June 5, buying time for debt ceiling talks. It comes after White House and Republican negotiators appeared to be closing in on a compromise agreement to raise the debt ceiling for two years but were still clashing Friday. The positive mood persisted despite hotter-than-expected PCE inflation data, reinforcing bets the Federal Reserve will maintain its hawkish stance and keep interest rates elevated for an extended period. On the corporate front, retailer GAP soared 12% after the company’s earnings beat on the upside. For the week, the Dow lost 1% while the S&P went up 0.3% and the Nasdaq notched its fifth straight week of wins.

Americas

Canada Stocks Rebound from 2-Month Lows
The S&P/TSX composite index of the Toronto Stock Exchange added 0.7% to 19,920 on Friday, recovering from a three-day losing streak that pushed the index to a 2-month low in the prior session, due to investor confidence received a boost from the upward movement in commodity prices and optimism surrounding a potential resolution of the US debt limit issue. In terms of corporate news, Canadian Western Bank announced that it no longer anticipated meeting its annual pre-tax, pre-provision income target and adjusted its expectations for lower annual growth compared to previous forecasts. Waste treatment company Anaergia reported that one of its units, Rialto Bioenergy Facility, had initiated restructuring proceedings, which could potentially have a positive impact on its cash flows in 2023. However, silver miner Silvercorp Metals fell short of analyst expectations on quarterly earnings and sales.

Brazilian Stocks Close at Nearly 4-Month High
Brazil’s Ibovespa stock index rose by 0.8% to close at 110,906 points on Friday, the highest in nearly 4 months and booked a slight increase for the week, driven by the perception that the lower inflation indicated by IPCA-15 and progress on the new fiscal framework in Congress could create conditions for the Central Bank to start reducing the Selic rate earlier. Finance Minister Fernando Haddad stated that Brazil is on the verge of entering a cycle of interest rate cuts, highlighting that inflation is more under control and the exchange rate is stable at a lower level than at the beginning of the government. In terms of stock highlights, CVC led the gains with an increase of 11.2% after appointing Carlos Wollenweber as the new CFO. On the negative side, Cielo’s stock fell 3.2% after the results of PagSeguro, which showed revenue growth but the worst total processed volume in a year.

Europe

European Shares Lower at End of Volatile Week
European shares staged a recovery at the end of a volatile week, bouncing back from multi-week lows on Friday. Germany’s DAX 40 index surged by 1.2%, reaching 15,984 points, while the pan-European STOXX 600 also climbed by the same margin, reaching 461 points. Investors remained cautious but gained some confidence as negotiations in Washington indicated progress towards reaching a deal on lifting the US debt ceiling. Reports suggested that the two sides were only $70 billion apart, keeping market participants on edge. In terms of corporate news, German media group ProSiebenSat.1 confirmed its full-year outlook, while Rio Tinto’s stock received an upgrade from “equal weight” to “overweight” by Morgan Stanley. Additionally, French supermarket company Casino resumed trading after a temporary suspension earlier in the week. The company officially announced the start of court-backed negotiations with its creditors.

UK Stocks End the Week Lower
The FTSE 100 added 0.7% to 7,627 on Friday, driven by mining stocks following the rise in metal prices. Global miner Rio Tinto gained 3.5% after receiving an upgrade from a brokerage firm. Precious metal miners benefited from higher gold prices, which rose against a weaker dollar as traders monitored the progress of US debt ceiling negotiations. At the same time, retail sales in the UK rose more than expected last month, led by sales of watches and jewellery and at department stores, offering some evidence that consumer spending remains resilient despite high inflation. Among single stocks, AstraZeneca went up 1.2% after reporting positive results in a late-stage trial of its cancer drugs. Insurer and asset manager M&G also saw gains after a price target raise by Morgan Stanley. On the other hand, cybersecurity company Darktrace tumbled 11% and tech firm Kin & Carta suffered a 9.0% decline after reducing its annual revenue expectations.
For the week, the FTSE 100 lost 1.7% confirming its top.

French Break Down
The CAC 40 surged 1.2% to the 7,319 level on Friday, tracking a global stock rally, as investors grew increasingly optimistic a deal on the US debt limit will soon be reached. Tech shares extended gains, with STMicroelectronics among the top performers (3.7%). On the week, however, the CAC 40 lost 2.2% breaking its uptrend pulled down by Luxury Stocks.

Spain Stocks Weaker on the Week
The IBEX 35 rebounded from earlier losses to close 0.82% higher at 9,191 on Friday, following its European peers, as the market cheered the recent progress in the US debt ceiling talks. Fluidra led the gains, up by 2.11%, after BlackRock raised its stake in the company above 6%. Other significant increases were recorded by ArcelorMittal (1.80%) and Indra Sistemas (1.67%), with the latter expanding its board to 16 members and giving a seat to Amber Capital. It was also a positive day for CaixaBank, which added 1.63% on the improved recommendation from Barclays. Conversely, Solaria and Sacyr declined by nearly 1% each. On the week, the index shed 0.7%.

Italian Stocks Break Down on the Week
The FTSE MIB gained 1.2% to reach 26,713 on Friday, tracking the positive performance of other European markets as optimism stemmed from progress in the US debt ceiling negotiations. Notably, STMicroelectronics surged 3.9%, building on the momentum generated by Nvidia’s results and guidance on Thursday. Interpump and Amplifon also saw positive gains, increasing by 2.7% and 2.5% respectively.
For the week, the FTSE MIB recorded a decline of nearly 3%.

Japan

Japanese Shares Topping Out
The Nikkei 225 Index rose 0.37% to close at 30,916 on Friday, climbing back toward its highest levels in over three decades, as Japanese technology stocks tracked their US peers higher after Nvidia’s earnings report boosted the outlook for semiconductor and AI-related companies. Investors also digested data showing the core inflation rate in Japan’s capital, Tokyo, slowed more than expected in May but remained well above the central bank’s target. Gains in the technology sector were led by Tokyo Electron (4.4%), Advantest (3.9%), Renesas Electronics (2.5%), IBIDEN (3.1%) and SUMCO (2.9%). Other index heavyweights also advanced, including Sony Group (0.7%), SoftBank Group (1.1%), Mitsubishi Corp (1.5%), Oriental Land (3%) and Hoya Corp (3.4%).

Both indexes end the week highly overextended and with a reversal on the TOPIX Index

China

China Stocks Post Sharply Weekly Drop
The Shanghai Composite rose 0.35% to close at 3,213 while the Shenzhen Component gained 0.12% to 10,910 on Friday, but mainland stocks still finished the week sharply lower following a selloff that brought the benchmark indexes to their lowest levels in about five months. Chinese markets were weighed down by weak global sentiment as geopolitical risks resurfaced and as investors cautiously awaited updates on the debt ceiling negotiations in Washington. Chinese technology stocks led the advance on Friday, tracking their US peers higher after Nvidia’s earnings report boosted the outlook for semiconductor and AI-related companies. Gains in the sector were led by Dawning Information (6.2%), Kunlun Tech (2.6%) and Inspur Electronic (3.7%). Meanwhile, new energy firms underperformed the market, with notable losses from Longi Green Energy (-2.9%), BYD Company (-3.4%) and Contemporary Amperex (-1.8%).

Hang Seng Closes Below 19,000 Mark
The Hang Seng plummeted 369.01 points or 1.93% to finish at 18,746.92 on Thursday, its lowest close since last December, being under pressure for the third straight session, amid a plunge on US stock futures following reports that Fitch Ratings put the world’s largest economy on watch for a possible downgrade should lawmakers fail to raise the US debt ceiling. The index fell below the 19,000 mark for the first time since March 20th, as some negative factors lingered, including a weak China recovery, worries over local government debt, and fears over a potential resurgence of COVID cases in June. Losses were across the board, with sharp falls from ESR Group Ltd. sank 4.9%, followed by Innovent Biologics (-4.5%), Zhongsheng Group Hlds. (-4.2%), JD.Com (-3.7%), Meituan (-3.1%),and China Gas Hlds. (-2.8%). Cathay Pacific Airways fell 2.5%, due to cabin crew incidents who made inappropriate comments about customers on a recent flight. .

India

Asia

Middle East

Commodities

Energy

Oil Prices on Track for Small Weekly Gain
WTI crude futures rebounded to trade above $72 a barrel on Friday, following a 3.3% slump the day before, and are on track to gain nearly 0.9% on the week. Traders continue to monitor the ongoing debt ceiling negotiations in Washington while weighing the supply outlook ahead of the OPEC+ meeting next week. Russian Deputy Prime Minister Alexander Novak pushed back against expectations of further OPEC+ production cuts, in contrasting remarks from Saudi Arabian Energy Minister Prince Abdulaziz bin Salman who warned short sellers to “watch out” for potential consequences. At the same time, the demand growth outlook remains fragile, particularly in China

US Natural gas Prices Fall Further
US natural gas futures extended losses toward $2.3/MMBtu, down from a 2-month high of $2.7 last week, driven by increased output and revised forecasts indicating lower demand in the coming weeks. The average gas output in the U.S. Lower 48 states rose to 101.5 billion cubic feet per day (bcfd) so far in May, surpassing April’s record. Despite a smaller-than-expected storage build, prices declined due to rising Canadian exports and milder U.S. weather conditions. Meteorologists projected near-normal weather conditions through June 9, and U.S. gas demand, including exports, is expected to ease in the coming week. Gas exports from Canada started to rise as energy firms ramped up production with easing fire conditions. Meanwhile, the amount of U.S. power generated by wind dropped, leading to increased gas usage by power generators. And gas flows to major U.S. LNG export plants have decreased due to maintenance work.

Copper

Precious Metals

Gold Prices Slightly Up
Gold prices gained for the first time in three sessions to $1948 an ounce on Friday, as the dollar softened a bit and traders continue to follow the debt ceiling standoff. However, data released this week for the US including a hotter-than-expected PCE inflation, consumer spending, durable goods, an upward revision to GDP and lower-than-expected initial claims strengthened the case for the Fed to hold interest rates higher for longer, pressuring the bullion down. On the week, the yellow metal is on track to fall 1.5%.

Soft Commodities

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