Last week, there were many economic information such as large corporate earnings reports, GDP data and inflation indicators that the Federal Reserve is concerned about. Investors are facing a massive influx of information and need to constantly reprice their assets. The market also showed large fluctuations, showing an N-shaped trend and finally closing higher. Especially driven by technology stocks (Microsoft and Google's earnings reports are encouraging), the stock market has recovered half of the decline in April. After falling 5.4% last week, the Nasdaq 100 index rebounded 4% this week, the S&P small-cap Russell 2000 rose more than 2%, and only the Dow Jones rose less than 1%

We found that the main narrative of the market has not changed fundamentally - the pace of economic growth has slowed slightly, inflationary pressure is high, geopolitical tensions continue, and interest rates have risen slightly. But

• employment market data continues to be strong

• the current market environment is in a process of reflation rather than recession

• and there is still a certain basis for the recovery of the global manufacturing industry

• in the just-released GDP data, personal consumption expenditure still grew at a relatively healthy rate of 2.5%,

• corporate equipment spending increased for the first time in nearly a year, and residential investment grew at the fastest rate in more than three years

so the overall environment is still favorable for risky asset investment in the medium term.

Figure: All S&P sectors closed higher last week

The Big Seven's profits are expected to grow 47% year-on-year in the first quarter, easily exceeding the S&P 500's expected 2% earnings growth. Three of the four companies that reported earnings last week saw their share prices rise (Tesla, Alphabet, Microsoft), with Alphabet performing well and announcing a dividend for the first time. But Meta, which had been performing strongly before, fell as the company announced lower-than-expected revenue forecasts while targeting higher capital expenditures to support artificial intelligence.

The trend of Meta shows that investors are more concerned about the future investment and spending plans of big technology companies rather than just their current earnings. Meta announced that it will increase its AI infrastructure investment by up to $10 billion this year. Such a large-scale expenditure scared investors and caused its stock price to dive 15% at one point.

Meta, Microsoft, Tesla and Google had a combined cash balance of up to $275 billion at the end of the first quarter. Investors will be happy if the company uses its huge cash to make strategic acquisitions and get direct returns. They don't want to see the company spend a lot of money on projects that don't know when they will be profitable. It feels that investors now have limited patience for highly valued technology stocks and they expect quick returns.

An episode is that people familiar with ByteDance said that if it loses the lawsuit in the end, the company prefers to shut down the entire software in the United States. On the one hand, TikTok is still a loss-making company for ByteDance, accounting for a very small proportion of revenue, and its closure will have little impact on the company's performance. On the other hand, the underlying algorithm in the APP is ByteDance's trade secret and cannot be sold. If TikTok is eventually shut down, the biggest beneficiary will definitely be Meta, but such news did not prevent Meta from plummeting after the market, but if it happens, we will most likely see Meta jump.

Chinese stock market becomes a hot commodity

Recently, Morgan Stanley, UBS, Goldman Sachs and other overseas investment banks have raised their ratings on the Chinese stock market, and policymakers have hinted that the PBoC may gradually increase its active trading in the secondary market of bonds, which may enhance market liquidity and improve investor sentiment.

Last week, net inflows of northbound funds hit a record high, with the CSI300 index rising 1.2%, the MXCN (MSCI China Concept Stock Index) and the Hang Seng Index rising 8.0% and 8.8% respectively, which was the best weekly return since December 2022, led by the technology sector (+13.4%). Analysts believe that the attractiveness of the low valuation of the A-share market is gradually emerging. With the continuous implementation of domestic economic growth policies, the numerator-side profit level and the denominator-side liquidity factor that affect the pricing of the A-share market are expected to be marginally improved, and the momentum of net foreign capital inflows may be further increased.

Another positive sign is the real estate market, such as the hot sales of luxury homes in Shanghai, which has driven up the new home price index. The Shenzhen property market has also shown signs of recovery, and the number of second-hand housing transactions has increased significantly. John Lam, the analyst who first gave a "sell" rating to China Evergrande in early 2021, said that after the adjustment, China's real estate industry is preparing to recover slowly. It is expected that China's real estate industry sales and prices will not rise this year, but the decline will be alleviated. He believes that domestic residential sales by area may fall 7% this year, less than the record 27% drop in 2022. New housing starts may fall 7%, narrower than the 39% drop in 2022. Once house prices stabilize, pent-up demand will return because the falling real estate price cycle in the past three years has caused people to postpone purchases.

In terms of interest rates, the 10-year Treasury bond rate closed at 4.66% last week, gradually approaching 5%, and the 2-year Treasury bond rate closed at 5%. This week, the market absorbed a total of $183 billion in new Treasury bonds. The demand for 2-year Treasury bonds is strong, and the 5-year and 7-year Treasury bonds are not bad either.

High interest rates are usually not conducive to a strong stock market:

Oil rebounded last week, up 1.92%. WTI crude oil closed at $83.64, the dollar was basically flat, and DXY closed at 106.09. Gold fell 2% to $2,337 as concerns about escalating conflict in the Middle East receded. The industrial metals index fell slightly by 1.2%.

Cryptocurrency lacks new catalysts

Due to the lack of new catalysts, the favorable macro market sentiment rebound failed to drive cryptocurrencies. BTC spot ETFs had net outflows for the third consecutive week (-328 million), and IBIT had zero inflows for three consecutive trading days, the first time since its launch.

After the conflict between Iran and Israel improved and Bitcoin was successfully halved, the crypto market rebounded, and BTC once rose to more than $67,000. With the first ETF of spot ETH in Hong Kong about to be listed on Tuesday, ETH rose by more than 7% over the weekend. In addition, Ethereum development company Consensys filed a lawsuit against the SEC on the grounds of regulatory overreach in order to counter the Wells notice received on April 10 (indicating that the SEC is working hard to file a case). Since it is not uncommon for crypto companies to sue regulators and win, this also hedges the regulatory pressure for Ethereum.

After the version reduction, the BTC network computing power remained high without a significant decline, but the mining difficulty increased:

Trump is more closely tied to loose monetary policy

Signs of stagflation

The initial estimate of U.S. real GDP in the first quarter grew 1.6% quarter-on-quarter, far below market expectations of 2.5% and a sharp slowdown from 3.4% in the fourth quarter of last year. However, the GDP-weighted price index in the first quarter was 3.1%, higher than the expected 3.0%, and almost twice the 1.6% in the fourth quarter.

Personal consumption expenditures (PCE) increased by 2.5% quarter-on-quarter, a significant slowdown from the previous value of 3.3%, and also lower than the expected 3%; the core PCE price index excluding food and energy increased by 3.7% quarter-on-quarter, exceeding the expected 3.4%, almost twice the previous value of 2%, and the first quarterly growth in a year. It shows that core inflation is still stubborn.

Signs of stagflation are the core logic of the market dive on Thursday.

Moderate debt issuance plan may bring optimism

The current cash level of the US Treasury is far higher than the upper limit of previous forecasts. As of yesterday, the Treasury had about $955 billion in cash in its general account, $205 billion more than expected. The Treasury's cash level increased significantly, mainly due to the unexpected high income from capital gains tax on April 15.

With the "surplus food in hand", the Treasury Department has no urgent need to issue short-term bills, causing the RRP balance to fall to near zero. In other words, the systemic liquidity in the United States will not fall to a level that causes market panic in the short term.

Over the past year, the U.S. Treasury has been accelerating its pace of debt issuance, but now it seems that this momentum is about to pause. Compared with fiscal 2023, the federal budget deficit in fiscal 2024 has narrowed, mainly due to strong revenue growth and basically flat spending.

Therefore, lower debt issuance expectations will be a general positive for risky assets for the market.

With less than seven months to go until the 2024 U.S. presidential election, U.S. fiscal policy may change significantly. Sooner or later, the Treasury may need to expand the auction again to meet future deficit needs, and the market may also need to adjust.

Small banks that are easy to confuse

After the close of Friday, media reported that Republic First Bank in the United States was taken over by the FDIC. However, a closer look at the FDIC data shows that Republic First had about $6 billion in assets and $4 billion in deposits in January. This bank is very small, and it is not comparable to the Silicon Valley Bank with $200 billion in assets, Signature Bank with $110 billion, and First Republic Bank (with a similar name) with $230 billion in assets that exploded last year. It was also delisted from the exchange last year. Therefore, it did not cause the market to "explode" digital currencies like last year.

Capital Flow

Under the EPFR caliber, China concept funds have been outflowing for 7 consecutive weeks, in contrast to the record inflow of northbound funds

Hedge funds bought U.S. stocks for a second consecutive week, the fastest in five months, mainly driven by long buying and short covering (ratio 7 to 1). Mainly concentrated in the information technology and healthcare industries, consumer goods, energy, etc. were sold.

Funds allocation to semiconductor stocks reached a five-year high.

Goldman Sachs strategists believe that rising inflation and policy risks may put pressure on the stock market in the short term. After the interest rate market adjustment is over and inflation data improves, it may be a good time to increase stock longs. High-quality and non-US stocks may perform better. (As risks in the U.S. stock market accumulate, some funds have begun to allocate high-quality stocks with lower valuations and more stable performance, as well as non-U.S. markets with improved fundamentals, to balance portfolio risks. These markets may be in or enter an easing cycle earlier than the U.S.)

Institutional Views

[JPMorgan Chase: TSMC's technological breakthrough, the key engine of the AI ​​era]

JPMorgan Chase's rating for TSMC is "overweight" with a target price of NT$900. The report highlights TSMC's leading position in technological innovation and advanced packaging, as well as its key role in the AI ​​era. Through a series of technological breakthroughs, including the launch of the newly announced A16 process node, the debut of advanced packaging technology SoW, and further innovations in silicon photonics technology. TSMC is expected to continue to maintain its leading position in the semiconductor industry in the coming years.

【Societe Generale: There may be a final, sharp decline before the yen hits the bottom】

Kit Juckes, foreign exchange strategist at Societe Generale: The decline of the yen has become disorderly, which suggests that there may be a final sharp decline before hitting the bottom. Currently, US yields are rising, while Japanese yields are still supported by very low short-term interest rates. These low short-term interest rates provide positive returns for shorting the yen, keeping the leverage trading community optimistic in the past few months. However, the yield gap between the US dollar and the yen will narrow significantly in the next few quarters. If the purchasing power parity of the US dollar/yen is now at the mid-90s, the fair value is still about 110 even after adjusting for US exceptionalism and Japanization.

Supplement: Most institutions believe that the central bank will release hawkish signals by adjusting bond purchases to support the yen. As a result, the Bank of Japan's resolution last week only said that it would maintain the scale of March, and did not say anything about reducing bond purchases. BOJ seems to have given up on the exchange rate. Such a dovish move will cause the yen to fall further, and in fact it has directly fallen below the 158 mark.

Focus this week

In the next few days, investors will turn their attention to the performance of Mag7 and other members. Amazon is scheduled to release its financial report next Tuesday, Apple will release it on Thursday, and Nvidia will release it on May 22.

The U.S. Treasury will announce its Treasury issuance plan for the next quarter on Monday and Wednesday. After increasing the scale of financing for three consecutive quarters, the market is closely watching this quarter's financing, repurchase plan, and Treasury Secretary Yellen's further explanation of the long-term financing strategy.

However, a series of interesting data may suggest that the US Treasury may unexpectedly reduce its funding expectations - which will lead to a squeeze on bond market shorts.

In addition, attention should be paid to the Fed's policy decision on Wednesday and Chairman Powell's press conference to assess the possibility of a rate cut in the short term. The market expects that the FOMC's post-meeting statement will not change much, and there will be no new dot plot release.

Chairman Powell is not expected to change the current monetary policy stance in the short term. He may reiterate recent comments that recent data has not strengthened his confidence that inflation will fall back. Considering that the latest federal funds futures implied rate shows that the expectation of rate cuts for the whole year is only 1.3 times/34bps, which is very extreme, if Powell does not give a significantly more hawkish speech, there is more room for yields to fall than to rise.

In addition, it is necessary to pay attention to whether the Federal Reserve will issue a statement on slowing down the balance sheet reduction to warm up the taper QT, and at the same time prepare for the possible sudden tightening of money market liquidity and slow down the recent rapid upward rate of US Treasury bond interest rates. If clear measures can be introduced, the market is likely to rise sharply.