Powell gives rate cut assurances

US equities rebounded Wednesday after a two-day decline, with the S&P 500 and Nasdaq up by 0.5% and 0.6%, respectively, and the Dow Jones gaining 76 points. Powell’s cautious stance on rate cuts, emphasising the need for inflation to reach 2%, shaped sentiment. Nvidia surged to a record high, while Apple continued its decline. In Europe, the STOXX 50 index rose 0.6%, buoyed by positive investor sentiment. 

Summary for 07.03.2024 

• Asian shares mostly declined due to conflicting signals from Federal Reserve officials on US interest rates, causing uncertainty. Japanese shares retreated from record highs amid speculation of a Bank of Japan policy shift, while Chinese shares dipped on US trade concerns. Australian shares edged up, but South Korean and Indian markets saw mixed movements. 
• European markets are anticipated to open cautiously ahead of the ECB’s policy decision, while US equity futures remained stable following previous session gains. Investors await Powell’s Senate appearance and key economic data. 
• Oil prices remained stable this morning following positive Chinese trade figures and a smaller-than-anticipated increase in US crude inventories. However, concerns over delayed US interest rate cuts tempered gains. China’s robust imports and decreased exports suggest a strengthening global trade environment, offering a glimmer of optimism for oil markets. 
• China’s trade surplus surged in the first two months of 2024 to $125.16 billion, surpassing expectations. Exports exceeded forecasts, growing by 7.1%, signalling resilience in overseas demand. Increased consumer spending during holidays boosted imports, reflecting improving economic conditions amidst previous challenges, although sustainability remains uncertain amid a modest growth forecast of 5%. 
• In his semiannual Monetary Policy Report to Congress, Federal Chair Powell indicated the Fed might soon begin easing policy restraint, contingent upon sustained movement of inflation towards 2%. He stressed uncertainty in the economic outlook, emphasising the need for data assessment and balancing risks in adjusting the fed funds rate.  Meantime, the President of the Federal Reserve Bank of Minneapolis, Neel Kashkari, predicted possibly one or two rate cuts in 2024, citing US economic resilience, which could support inflation expectations and allow the Fed to maintain higher rates.  
• In February, US private businesses added 140k jobs, slightly below the forecasted 150k. Services contributed 110k jobs, with notable increases in leisure/hospitality (41k) and construction (28k), while manufacturing added 6k jobs. Job changers’ pay gains accelerated to 7.6%, yet the labour market dynamics may not heavily influence Fed rate decisions this year. 
• UK Finance Minister Hunt announced permanent tax cuts including a 2pp reduction in national insurance payroll tax. The Office for Budget Responsibility forecasts predict a quicker inflation decline below 2% within months, earlier than expected. Economic growth projections are raised to 0.8% in 2022 and 1.9% in 2025, with reduced budget deficit and public sector net debt. 
• UBS analysts compared the current bull market to the 1990s, noting similarities in Fed policy shifts and sectoral patterns. However, they highlighted differences in margins, earnings, and productivity growth, suggesting the current rally lacks the anatomy of a bubble. They cautioned that weak economic indicators could hinder a sustained bull run. 
• Foot Locker’s shares plunged 27% yesterday after the company projected 2024 profits below Wall Street expectations due to increased investments to boost demand. Despite a solid holiday quarter, the retailer delayed its long-term profit margin target to 2028, disappointing investors. Analysts downgraded the shares, citing concerns about inconsistent growth. 
• Abercrombie & Fitch reported strong Q4 earnings and revenue, beating analyst expectations. Despite this, shares fell on Wednesday. The company’s CEO, Fran Horowitz, expressed pride in the performance, highlighting a 16% increase in comparable sales and a robust gross margin. The company projects 4% to 6% net sales growth for fiscal 2025. 
• JD.com shares surged over 16% on Wednesday after the Chinese online retailer reported Q4 revenue above estimates and announced an expansion of its share repurchase program. CEO Sandy Xu Ran emphasised international expansion, highlighting the focus on supply chain development. Despite internal audit concerns, JD’s popularity among cost-conscious buyers increased. 
• Goldman Sachs, RBS Capital, Scotiabank, and Macquarie all raised their price target for CrowdStrike Holdings, reflecting confidence in its strong performance. RBS set theirs at $420, while Scotiabank and Macquarie opted for $400 and $370 respectively, maintaining Outperform ratings. Goldman Sachs increased the target to $400, citing impressive Q4 results with a 27% Net New Annual Recurring Revenue increase and 25% EBIT margin. These adjustments highlight CrowdStrike’s robust financials, technological edge, and growth prospects in cybersecurity. 
• Argus initiated coverage of Super Micro Computer with a Buy rating and a $1,350 price target, citing its leading position in providing computer and server solutions for generative AI. They highlight accelerating revenue and earnings growth, driven by demand for optimised rack-scale solutions in the age of generative AI. 
• Jefferies reiterated a Buy rating and a $465 price target for Microsoft, citing strong initial adoption of Microsoft 365 Copilot within IT departments. While data governance concerns persist, investments to address latency issues are underway. Overall, Jefferies finds Microsoft’s valuation attractive, driven by potential AI upside. 
• Deutsche Bank raised Amazon’s price target to $210 from $200, maintaining a Buy rating, citing its significant market outperformance and projected growth in operating income. They emphasised the potential of Amazon’s Advertising business, particularly Prime Video Ads, projecting $4-6 billion in revenue by 2025, leading to a 10% increase in 2024 Operating Income estimates. 
• Tesla’s stock fell 2% yesterday after Morgan Stanley’s analyst lowered the price target due to weakening electric vehicle demand, particularly in China, despite ongoing price cuts. Concerns persist over high interest rates, charging infrastructure, and battery range. Tesla’s aging product lineup and production disruptions also contribute to the shares decline, losing over 56% since November 2021. 
• Goldman Sachs upgraded International Airlines Group to ‘overweight’ from ‘underweight’, raising the price target to €2.50. Despite concerns over capacity growth, 2023 results indicate earnings stability. IAG’s re-investment cycle in 2024 is expected to boost EBIT margins from 2025, with potential upside from British Airways’ recovery and improved cash flow generation. 
• Apollo Global Management is reportedly considering a bid for TripAdvisor. Talks are in preliminary stages, with TripAdvisor’s special committee engaging in acquisition preparation. Shares spiked initially on Wednesday but flattened by the end with the company’s estimated valuation standing at around $3.5 billion, including net debt. 

• The Dutch government is engaging with ASML to prevent the semiconductor equipment maker from relocating or expanding abroad due to concerns over anti-immigration policies. ASML’s CEO expressed worries about the worsening business climate in the Netherlands, citing reliance on skilled foreign labour and potential restrictions on foreign students. 
• Chemours Co revealed that its top executives violated the firm’s code of ethics by manipulating financial disclosures, aiming to meet free cash flow targets for incentive compensation. Similar actions may have occurred in Q4 2022. The impact on net cash flow measures is being assessed, with potential internal control weaknesses identified.