| Good morning. Arm's forecast underwhelms. Xi arrives in Hungary. Consumers sour on EVs. Fed's Collins counsels patience. Here's what's moving markets. — Isabelle Lee Arm Holdings slipped after the chip designer gave a lukewarm revenue forecast for the fiscal year, raising concerns that the tech industry's AI spending spree is slowing. For fiscal 2025, revenue will be $3.8 billion to $4.1 billion while profit will be $1.45 to $1.65 a share, the company said. Analysts were predicting sales of $4.01 billion — representing a gain of 26% — and a profit of $1.53 a share. Three months ago, an upbeat forecast sent Arm shares soaring and helped turn the company into an AI darling on Wall Street. The stock had climbed 41% this year through Wednesday's close. Arm's chip designs and licensed standards already serve as critical technology for most smartphones. Under CEO Rene Haas, the company has been trying to parlay that position into a bigger presence in data-center hardware — where AI demands are spurring major upgrades. As part of that push, Arm is offering more complete blueprints to companies such as Amazon's AWS. President Xi Jinping touted China's ties with Eastern Europe as a boon for the economy as he arrived on the final legs of a tour to promote his country's potential as a trade partner. Xi landed in Hungary on Wednesday after visiting France and Serbia during his first trip to Europe in five years. He's due to sign more than a dozen agreements in Budapest covering rail, road and energy projects, with Prime Minister Viktor Orban's cash-strapped government also looking to lock in financing for some of the investments. The Chinese president called the stronger links with the region a move toward global stability and development. There has been growing tension between Beijing and Brussels, however, with Western European leaders accusing Xi's government of flooding their markets with cheap exports that threaten jobs. Xi's support for Russia despite its war in Ukraine has thrown the relationship further off balance. A slowdown in the demand for electric cars has sparked such a brutal price war that even industry behemoth Tesla is struggling to cope with. But for the newer entrants in the race, the struggle is fast turning into a battle for survival. This week's lackluster quarterly reports from once-promising EV startups made clear what analysts and investors have worried about for a while now: Rapidly dropping prices on EVs will hit the smaller, unprofitable carmakers the hardest. Two of the most prominent in that group — Rivian and Lucid — reported wider losses than expected, after burning through a staggering amount of money for every vehicle they sold. The pair have been on a downward spiral ever since they went public in the EV heyday during the Covid-19 pandemic era. Both stocks now trade more than 90% below record highs. For the rest of the group, the picture is strikingly similar. Federal Reserve Bank of Boston President Susan Collins signaled interest rates will likely need to be held higher for longer than previously thought to curb demand and reduce price pressures. Collins, who noted the lack of disinflationary progress in 2024, said slower economic growth will be necessary to make sure inflation remains on a sustainable path to the Fed's 2% goal. She didn't offer an estimate on when rate cuts may happen. Her comments echoed those of Fed Chair Jerome Powell, who last week said the Fed had more work to do to gain confidence in inflation returning to its target. Wall Street's enthusiasm for stocks faded after a four-day advance. Equities fluctuated, with the S&P 500 remaining below 5,200. Lack of conviction among investors to buy into the recent bounce shows the market is far from turning fully bullish, according to Citigroup. Treasury 10-year yields advanced three basis points to 4.49%. The dollar rose. It's a heavy day for economic data Thursday. Japan's March labor cash earnings are due, which Bloomberg Economics says will likely show that wage growth accelerated to a solid pace, near 2%, backed by an increase in base pay for regular workers. Also due is the BOJ's summary of opinions from its April policy meeting. In China, trade data for April is slated to be released. BE says the numbers will likely show exports and imports swinging back to year-on-year increases, in part due to less-challenging bases of comparison. The Philippines will publish its GDP figures. Growth in the nation may have slowed to 5.3% year-on-year in the first quarter, from 5.5% in the previous period. Bank Negara Malaysia is due to issue a rate decision, with BE expecting the bank to hold its overnight policy rate at 3.00%. Elsewhere, the Bank of England is scheduled to release its own rate decision. The US has jobless claims data on tap. Here's what caught our eye over the past 24 hours: - Gaza is China's new wedge issue to split US from global south
- Cocoa rally is spilling into coffee as traders run out of cash
- Modi alleges without evidence Adani, Ambani gave illegal cash
- US pauses arms shipment to Israel on Rafah invasion concerns
- Japan's Itochu in talks to buy LNG from Canadian project
- Gen Z relies on debt more than millennials did at this age
- Look: The $46 million art collection of Norway's wealth fund boss
The market environment right now is "Peak Goldilocks." The optimism about AI and global growth buoying the mood of investors can't get much stronger than this. Since Jerome Powell told us last week that the Fed's next move was "unlikely" to be a hike, we now know the rise in rates is capped, limiting downside risk. And the 4.2% run-rate of second-quarter GDP on the Atlanta Fed's GDPNow tracker suggests more growth in earnings to come. But there's a tension here. You can't have risk assets going up at the same time consumer price inflation is well over 3% and growth estimates are above 4% without a policy response. Either growth and inflation have to slow or rates will have to rise. My bet is on the former, as the Citi Economic Surprise Index is already at the lowest levels in over a year. This is why CEOs at US consumer companies are sounding cautious and appear to be concerned about consumer fatigue. Consider: - Starbucks CEO: "many customers are being more exacting about where and how they choose to spend their money"
- Amazon CEO: "customers are shopping but remain cautious, trading down on price when they can, and seeking out deals"
- McDonald's CFO: "the macro headwinds have been more significant than I think we even anticipated coming into the year. And we continue to see those macro headwinds as we have started quarter two"
And then came the Arm earnings report Wednesday. The chip designer, one of the biggest beneficiaries of the AI-fueled rally, gave a cautious revenue forecast, another sign that the US is more likely to slow than overheat. Meanwhile, the IMF says the outlook for Asia and the Pacific has turned upward just as the US is potentially slowing. They're talking about 4.5% growth this year on top of the 5% in 2023. And with Europe growing as well, having recovered from recession, the baton looks to be moving from the US to the rest of the world. It may be Peak Goldilocks in the US, but the rally in risk assets globally still has legs. Ed Harrison writes the Everything Risk newsletter. Follow him on X at @edwardnh. | 
No comments:
Post a Comment