Is Fed Still on Track for a 2024 Rate Cut?

Mood among investors is not cheery into the Federal Reserve’s (Fed) latest monetary policy decision due later today. And it’s understandable. The Fed must respond to three straight month jump in inflation and probably take a step back in its plans to cut the interest rates this year. There is even a risk that the Fed drops the expectation of a rate cut in 2024; that’s the most dovish statement that could reasonably be expected from the Fed at this point, and in the light of the latest economic data.

Speaking of data, figures released yesterday came to back the idea that the Fed’s inflation battle doesn’t necessarily continue to move toward the right direction. The employment cost index rose more than expected in the Q1. The consumer confidence on the other hand sank below 100, it should yet result in slowing spending to help inflation tame – a thing that we haven’t seen yet. The S&P500 fell more than 1.5% yesterday and posted the worse performance this year, the US 2-year yield – which best tracks the Fed rate bets – advanced past the 5% level ahead of the Fed decision and the US dollar extended gains for the fourth month. Investors will watch the ADP, JOLTS and PMI numbers today, but it won’t change the fact that the first quarter of the year was marked with strong jobs data and a notably rise in US inflation. The Fed must address the inflation issue by keeping its rates higher for longer.

Holly AI

If the first few months of the year ended in tears for the Fed doves, the AI-related stocks lived up to very high expectations in the Q1. All the Maginficent 7 stocks that reported earnings so far – except from Tesla – surpassed high market expectations. Amazon posted the best beat among them, as its AWS cloud platform grew 17% compared to the same time last year thanks to sustained AI demand and its advertising services jumped 24% over the same period thanks to new ads on Prime Video.

All in all, Amazon added another piece to the AI puzzle revealing that demand for AI remained robust in the first three months of the year, but the stock price rose less than 2% in the afterhours trading as a weak sales forecast for the current quarter tempered optimism regarding the Q1 results. So maybe – but just maybe – we will see AI growth level out in Q2, and trigger a certain profit taking tech stocks?

Regardless, Amazon remains a strong AI play. They not only benefit directly from AI investments through the AWS unit, but AI also enhances the company’s ad business, as well as automated operations and logistics.

Eurozone exits recession

Eurozone grew at the fastest pace in 18 months and exited recession in the Q1. Germany, France, Italy and Spain – all – exceeded forecasts. Core inflation also slowed in April, though it slowed less than expected. Yesterday’s better-than-expected growth and hotter-than-expected inflation figures could’ve weighed on European Central Bank (ECB) doves, but traders were too busy pricing in the Fed expectations that yesterday’s minor surprises from the Eurozone couldn’t help the euro counter the increased bullish pressure in the dollar. The EURUSD slipped to 1.0650, and risks are tilted to the downside at today’s FOMC announcement.

In energy, US crude cleared the 50-DMA and slipped below the $82pb level after the latest AI report posted an almost 5-mio-barrel build in US oil inventories last week. Hope of easing geopolitical tensions keep the bears in a dominant position while the fading expectations of a Fed rate cut threatens the reflation boost. That also explains why we saw such a sharp drop in copper futures yesterday. Back to oil, the next natural target for the oil bulls stands at $80pb level, that shelters the 200-DMA and the major 38.2% Fibonacci retracement on ytd rise.