Written Commentary
Stalled US/Iran negotiations and key speech by BoJ’s Ueda in focus; digesting Australia GDP and OECD forecast update, awaiting Services PMIs/ISM, US ADP Employment and Fed Beige Book; earnings from Broadcom and CrowdStrike.
- Japan: markets circle JPY as Takaichi govt high-wire policies threaten JPY
- USA: ADP Employment seen posting solid gain, Fed Beige Book to paint mixed but overall positive growth picture, highlight margin pressures
- Alphabet secondary offering and Tech mega IPOs likely a major turning point for equities after decades of de-equitization
** PLEASE NOTE: There will be no further updates this week due to holidays.
EVENTS PREVIEW
Stalled deal negotiations between the US and Iran remain front and centre, though it is very doubtful whether it can be achieved without Israel agreeing to cease military activity in Gaza and the Lebanon, with the Israeli government showing zero interest in making any such agreement. A relatively light statistical schedule has Australian Q1 GDP, Services PMIs/ISM, US ADP Employment and Fed Beige Book, with the OECD issuing its updated Economic Outlook, a smattering of central bank speakers (focus on Ueda), and a couple of tech sector sensitive corporate earnings reports from Broadcom and CrowdStrike. In the background, Google parent Alphabet’s decision to raise a whopping $80 Bln via its first secondary equity offering in more than twenty years to help fund its AI investment plans is likely to prove to be a signal moment, as it was during the dotcom bubble. After decades of de-equitization due to buybacks and a very limited flow of IPOs, this may signal a turning point with supply turning positive, above all given the mega IPOs being lined up for OpenAI, Anthropic, SpaceX, etc., leaving alone the complexities of associated index rebalancings. This is also important to consider given that equities are increasingly proving to be largely insensitive to energy price and bond yield rises in reaction to Persian Gulf news, Greenspan’s ‘irrational exuberance’ quip during the dotcom boom looks to be appropriate.
As noted in my recent Ghost In the Machine article ‘Japan’s High-Wire Economic Challenge’ PM Takaichi’s policy parameters are fraught with risks, with the inefficacy of the $73.14 Bln of its FX intervention since the end of April all too plain to see with the JPY toying with a break of the key 160.00 level vs. the USD, and a supplementary budget of $19.0 Bln to cap energy prices putting further upward pressure on JGB yields, as markets wait for a key speech by BoJ’s Ueda. The fact remains that a 25 bps June rate hike will leave the BoJ still well behind the curve on rates, and should the BoJ only vaguely commit to further rate hikes thereafter, the risk of a disorderly upside break on USD/JPY looks to be very real.
** U.S.A. – Fed Beige Book **
The Beige Book will likely continue to paint a mixed, though generally positive picture of overall economic activity, with labour demand still likely characterised as ‘steady to up’. The focal point will be prices which in April were described pressures as “moderate overall, with the vast majority of Districts reporting moderate increases and others pointing to modest growth. Generally, input cost increases outpaced selling price growth, compressing margins. Energy and fuel costs rose sharply in all Districts, attributed to the Middle East conflict, leading to higher freight and shipping costs and higher prices for plastics, fertilizers, and other petroleum-based products. Input cost pressures beyond energy-related increases were also widespread.” Margin compression will remain; the question is whether price pressures continued to be described as ‘moderate overall’ or accelerating.
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