- Could QT tapering give the Fed optionality in the bond market?
- Powell rules out rate hikes; and
- S&P 500 continues to look tentative post big-tech earnings
- Amazon earnings – expecting 15-20% growth w/AWS and a surging Ads business;
- Apple to post weak iPhone sales and any possible mention of AI chips; and
- Powell’s dovish plans to revise QT tapering – perhaps starting as early as May
So what was the result?
Amazon delivered an impressive 17% growth for AWS ($25B for the quarter – beating the market’s expectations – but inline with mine); and their Ads business surged 24% YoY ($11.8B for the quarter)
Amazon continues to dominate both the cloud and online retail market (lending itself to a powerful ads business).
As for Apple, it was a mixed bag.
iPhone growth was down 10% and total revenue declined 4% (their 5th such revenue decline in 6 quarters).
That said, Cook said he sees a return to single digit revenue growth next quarter.
The one bright spot:
Their services business was up 14.2% YoY to $23.9 billion – where it is able to monetize about 50% of its total 2B install base (with over 1B paid subscriptions)
And that’s why Apple commands the “27x” multiple it does…. the growth and 60%+ margins in services to very sticky user base of around 2B people.
That said, Cook was coy on what Apple has planned for AI.
Perhaps look for more on this at WWDC in June
Despite the earnings (and sales growth) disappointing – the market loved what I call “financial engineering”.
IBM were the masters of this for years – now Apple has taken the baton.
Apple announced a staggering $110B share buyback – the largest of any on record (for any business).
You might wonder if Apple are running out of ideas on what to do with its billions in cash?
But here’s my question:
With their $170B+ cash hoard earning 5.0% in short-term treasuries – is buying back their stock at a forward PE of close to say 30x a good bet?
Not from my lens.
Yes, I’m all for buying back your own stock at the right price.
This is a very shareholder friendly thing to do (and is far more tax advantageous vs dividends)
And whilst this will reduce their float (i.e., improving their earnings per share) – I question whether this is the most prudent move?
What’s more, they continue to buy back around $18-20B of float each and every quarter (and have done for many years) – so not a lot has changed from that perspective.
Regardless, the market cheered the buyback, with the stock up ~6% after hours.
We will see how it fares over the coming weeks and months – as I still think you get Apple cheaper.
As I’ve said in the past – getting Apple somewhere between 20x and 25x is a better long-term bet.
Let’s talk Fed…
For me, that was the most important item on the docket this week.
A Dovish Powell Panders to the Market
- Are rate hikes off the table – given faster-than-expected inflation and continuing economic strength? and
- When will the Fed commence QT tapering (and by how much)?
Powell was unequivocal on possible rate hikes… forghedaboudit.
Equities cheered.
But why remove optionality?
I continue to question why Powell is so convinced we don’t see a re-acceleration in inflation?
Admittedly it’s a lower probability outcome… but we can’t rule it out.
But he apparently can?
For example, does Powell have control over the borrowing and spending behavior of 330M people?
No. Of course not.
And what’s more – can he forecast their behavior?
It’s a rhetorical question – the Fed have a woeful forecasting record.
Inflation was transitory right?
Hmm mmm.
And in 2007, there were apparently no signs of excess speculation in the system (with GDP expected to be 2-3% over 2008 with strong employment)
All over it like a bad rash.
But here’s Powell saying forget about rate hikes as the battle with inflation is ‘basically’ won.
Now the Fed’s preferred measure of core inflation, which strips out food and energy costs, most recently came in at 2.8%.
This has Powell boxed into a corner (for now at least).
This is not where the Fed has decided it needs to be… therefore he is unable to cut rates in the near-term (which I argued would be the case 6+ months ago – when the market was pricing in 6 or 7 rate cuts)
Here’s Powell:
“My expectation is that we will, over the course of this year, see inflation move back down. That’s my forecast.”
He noted that his confidence in that outlook is lower than it had been, due to the string of disappointing figures on consumer prices.
But even so, Powell added that “evidence shows pretty clearly that policy is restrictive and is weighing on demand.”
He Powell cited both US job openings – which dropped to a three-year low – and lower private sector investment (something I called out when reviewing GDP)
The only reason GDP was positive last quarter was thanks to the government credit card.
With respect to tapering of QT – Powell appeased the bulls.
And whilst QT tapering was expected – there were two nuances:
- The amount of tapering exceeded expectations; and
- The cutback is strictly on the Treasuries side while agencies and mortgages remain unchanged.
Powell said the Fed would scale back the pace of QT starting on June 1, allowing only $25 billion in Treasury bonds to run off each month versus the current $60 billion.
Now can this be interpreted as “easing”?
The answer is it depends.
On the one hand, less restrictive policy does not equate to being accommodative.
However, reduced QT gives the Fed optionality to engage in yield curve control (which could be accommodative).
For example, the Fed can be selective about where it reinvests the proceeds of maturing bonds (e.g., intervening in the Treasury market)
Question is where is that money going?
Put together, these takeaways from the Fed’s statement pleased the market (for the most part).
This was not a hawkish Powell – despite having ample ammunition to squash the doves given recent inflation data.
It just reinforces to me that Powell is a committed dove (like all his predecessors) – but I question why he continues to remove optionality?
Market Reaction…
With big-tech earnings and rate hikes off the table (we have monthly payrolls tomorrow) – the market still appears tentative.
Bulls have clearly lost their momentum.
Let’s take a look using my preferred weekly time horizon:
May 2 2024
From mine, how we close relative to the 10-week EMA (red-line) is important.
For example, following strong earnings from Microsoft, Meta and Google – we rallied to test this moving average. However, that’s where prices stalled.
Bulls would have liked to have seen a close back above this EMA.
This week we pivoted lower despite what I thought was a “dovish Fed” and strong earnings from big-tech.
Apple’s $110B share buyback announcement will likely buoy the stock tomorrow (e.g., 3-5% higher) – but perhaps not enough to push the S&P 500 into positive territory for the week.
From a technical lens, a close below the 10-week EMA is near-term bearish. However, the opposite alos holds true.
As I wrote last week – I think we’re headed back towards a re-test of the 35-week EMA – which is ~4800.
And I would offer a 30% probability we test the previous high labelled “A” at 4600.
4600 would represent a correction of around 12% and a buyable opportunity.
For clarity, the market would still look bullish (using the weekly timeframe) with a 12% correction.
Putting it All Together
Payrolls tomorrow will be closely watched.
As I wrote the other day – the market will expect something in the realm of 250,000 to 300,000 job additions (the average of the past 12 months).
Immigration is having an outsized impact on the gains.
However, if we’re to see material weakness (or strength), it could be market moving.
A well below 200,000 will increase the odds of a rate cut; and a number above 300,000 potentially takes one off the table.
To that end, watch for the reaction on the 10-year yield.
It will fall sharply if the market thinks rate cuts are coming (which will be bullish for equities)
That said, the ‘read-through’ is also important (e.g. hours worked, part-time vs full-time, and where the jobs are being added or lost)
For example, are the jobs largely public sector jobs (which drain tax dollars); or private sector jobs (which are tax producing)?
The trend the past few months has been a combination of:
(a) far more part-time jobs (with full-time jobs diminishing); and
(b) the public sector adding in the realm of 60K jobs per month.
It would be a welcoming sign to see these trends reverse…