Markets Wrap (15–29 May)
Stocks
Chip maker Nvidia is within touching distance of becoming the 9th company ever to reach 1 trillion USD market cap after revenue guidance which smashed market expectations was followed by 26% share price rally. The blowout forecast benefitted other companies related to the development of artificial intelligence models as well and lifted NASDAQ to the highest level since April 2022.
Inflation
In April, US PCE inflation – FED’s preferred price growth metric (due to being considerably less volatile than CPI) exceeded consensus estimates – both headline (4.4%) as well as core (4.7%) figures were 0.1 pps higher than Bloomberg median forecasts. Due to sticky inflation and better than expected macro data, expectations of another 25 bps FED hike at the upcoming June meeting have risen from virtually zero at the beginning of May to over 60%.
Another big inflation surprise leaves the Bank of England with little choice but to raise interest rates in June and perhaps, continue monetary policy tightening afterwards. CPI in April stood at 8.7%, less energy and food prices at 6.8% – at 0.5 and 0.6 pps above the median forecast respectively. The market discounts four more hikes in total, which would bring the key rate to 5.50%.
US debt limit
The White House and House Republican party representatives struck a debt limit deal to avert default (which based on the most recent Treasury estimate, would come as soon as 5 June). The agreement still needs to be approved by Congress. It would suspend the debt limit until 1st January 2025, cap non-defence spending to current fiscal year level for 2024 and increase it by 1% in 2025. US Treasury market breathed a sigh of relief following the news, with the yield of bills maturing on 6 June plummeting from 6.68 to 5.45%.
Macro
German economy's GDP growth estimate has been revised from zero to 0.3% contraction from the previous three months, which follows a 0.5% drop in October-December. A reluctance by households to spend was obvious in various segments of consumer goods, whereas government spending declined. Investment increase was a bright spot, as strong construction activity was aided by unusually warm weather. The French economy showed resilience over the winter, but business leaders are becoming gloomy about the future. French business confidence indicator in May fell to the lowest since April 2021.
Commodities
The price of natural gas in Europe remains on a steep downtrend. Dutch TTF spot price fell to EUR 25 per MWh, down by 62% since the beginning of the year. Looking long-term, some market observers state that Europe's plans to build import terminals in order to replace Russian supply have gone too far and import capacity, projected to rise by 50% by the end of the decade, is likely to significantly outpace demand for the fuel after 2030.