Even though we saw some consolidation on Friday following a significant rally during the week, last week ended on a great note for the major US, European and Japanese stocks. Many major indices hit ATH levels after Nvidia (NASDAQ:NVDA) reported blowout quarterly results. This week starts with the relief that there is not a major fireball that could fall in the middle of the market and wreak havoc across the financial markets. Nvidia was pointed as one thing that could possibly go wrong. And not only did it not go wrong, but it did go very well, on the contrary. But consolidation wouldn’t be a bad thing, given that the S&P 500, for example, is still trading very close to the overbought market conditions, and at ATH levels.
It’s important to keep in mind that while everybody was watching Nvidia with their stomachs in their mouth - and the broad-based stock rally that followed its earnings, the US yields were gently drifting higher. The 2-year yield hit 4.75% last week, and the 10-year yield hit 4.35% before falling back to around 4.22% this morning. Higher yields – which are the result of the delayed rate cut expectations are not necessarily good for stock valuations, but the negative correlation between the yields and the technology stocks has significantly softened. Technology stocks go where they want to go regardless of the Fed expectations. That could change when the news flow from earnings slow and attention shifts toward the economic data and to Fed again, but there is no short interest against the Magnificent 7, investors are not willing to play against the tech giants that are clearly surfing on the AI rally, no matter where the Fed goes with its rates.
This week, investors’ attention will gently shift from earnings to economic data. At this point, the US economy has been resilient and the latest uptick in the CPI data helped investors understand that the Fed will not be cutting its rates any time before summer. The first Fed cut expectation is seen coming by June, with a little less than 70% probability and the Fed is seen cutting the rates by 80bp this year. Also due this week, the latest US GDP update – due Wednesday - is expected to confirm a 3.3% growth in Q4, with a significantly lower price index. And on Thursday, the PCE data are expected to confirm relatively soft figures – softer than the CPI, most probably thanks to the different weights that the index attributes to different categories of goods and services. In all cases, a strong growth could revive the goldilocks optimism if inflation numbers continue to trend lower. For the market rally to continue, we just need strong growth and soft inflation data from the US. Easy, no?
Elsewhere, the Reserve Bank of New Zealand (RBNZ) will announce its latest policy decision on Wednesday and is expected to keep its rates unchanged at 5.5%. There are some rising rumors regarding the possibility of a rate hike from the RBNZ this week, but I believe that the Kiwis will simply warn that more policy tightening cannot be ruled out without however taking concrete action this week. If they did, that could eventually weigh on broad market sentiment. Yet, that’s a tail risk. Other than that, Europeans will release their latest inflation updates throughout the week. Both headline and core figures are expected to have further eased below 3%. Softening European inflation – if coupled with strong US growth – could keep the EUR/USD under pressure near its 200-DMA. Even though European Central Bank’s (ECB) Holzmann said last week that he doesn’t see euro-area cut rates before a Fed move, the euro-area officials should face the fact that their economies are doing nowhere near the US’. Of course, the ECB cannot act alone, because a too-early rate cut compared to the Fed would dampen the euro’s valuations against the US dollar and fuel inflation – something that no one wants to happen. But fundamentally, the Europeans are in a better position to start cutting first and I continue to believe that the EUR/USD deserves more to depreciate against the greenback at the current levels than the contrary.