Daily Market Comment – Techs extend rally amid optimism, dollar eyes inflation data

  • Wall Street in buoyant mood despite mixed earnings as Tesla surges
  • Dollar firms after solid growth data, PCE inflation coming up next
  • Yen edges up as BoJ yield policy tested again after Tokyo CPI rise

Equities shrug off gloom as tech stocks rally

The Nasdaq is headed for a fourth consecutive weekly gain, outperforming both the S&P 500 and the Dow Jones, as tech stocks stage a surprise comeback in 2023. The earnings season went into full gear this week and more than two thirds of S&P 500 companies that have reported so far have exceeded the consensus estimates.

However, the fourth quarter performance doesn’t accurately reflect the full picture as several firms, including tech giants Microsoft and Intel, issued pretty gloomy guidance for the current quarter. Yet, investors seem to be ignoring the risks to the outlook and the New Year party looks set to stretch the whole of January.

While there is a danger that there could be one big hangover once the rally runs out of steam, the optimism isn’t entirely baseless. For one, tech stocks were the big losers in 2022 and the sky-high valuations have come down significantly. Moreover, the latest earnings, together with the recent jobs cull announcements, suggest most tech firms have a plan of action to get them through this downturn.

Some, like Tesla, are even enjoying continued growth in sales. The electric vehicle maker reported a massive earnings beat on Wednesday, with CEO Elon Musk optimistic that car sales could hit two million this year. Tesla’s stock soared by almost 11% yesterday, lifting the Nasdaq Composite by 1.8%. There were losers too, however, in the tech sphere, as IBM shares slumped by more than 4% as it missed its EPS estimates.

Recession fears ease, oil up, gold slips

The upbeat tone spread to Asian markets in Friday trading, with easing recession fears adding to the positive sentiment. The US economy grew slightly more than expected in Q4 according to Thursday’s advance GDP reading, while jobless claims fell to the lowest since April 2022, pointing to further tightening in the labour market.

Investors were also encouraged that China’s economic recovery won’t be delayed by high Covid infections after a government report indicated that both hospitalizations and deaths have fallen sharply this month.

The news helped oil prices to edge higher and recoup the losses from earlier in the week. But gold’s bullish run suffered a setback after the US dollar bounced back from eight-month lows yesterday.

The precious metal was last trading around $1,925/oz, climbing down from yesterday’s nine-month high of $1,949/oz.

Dollar finds support, yen firms on BoJ speculation

The greenback has been tracking Treasury yields higher following the solid set of US data, although the dollar index gave back some gains to turn flat as European markets opened today. The odds of a 50-basis-point rate hike by the Fed next week ticked up only slightly after the data barrage, suggesting investors still see the Fed treading more carefully this year.

Markets appear to have a short memory when it comes to the recent FOMC meetings where Chair Powell has been repeatedly pushing back against bets of a dovish pivot. There’s a reasonable risk the same could happen again on Wednesday.

However, investors will likely be unfazed by a hawkish Fed if today’s PCE inflation numbers are soft as expected and do not disappoint. The core PCE price index is forecast to have dropped to 4.4% y/y in December, while personal consumption is anticipated to have declined by 0.1% m/m.

It’s a somewhat different picture in Japan where inflation has yet to peak. Core CPI in the Tokyo district increased by more than expected in January to reach 4.3% y/y. The 10-year JGB yield jumped to 0.48% after the data, coming dangerously close to the Bank of Japan’s upper yield cap of 0.50%.

The Japanese yen is broadly higher today, going against the risk-on tide, as speculation that the BoJ won’t be able to maintain its yield curve control policy for much longer is only intensifying. Nevertheless, its gains were modest and most major pairs were slightly retracing yesterday’s moves amid some caution ahead of next week’s trio of central bank meetings by the Fed, ECB and Bank of England.

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