Hello, my friends. Today is May 2nd and this is Markets Weekly. All right, so last week, another great week in the markets. S&P 500 making new all-time highs. Today, let's talk about three things. First off, let's talk about the economic data we got last week, which was of course GDP data, and of course, MAX7 earnings, which are tremendously important when it comes to the stock market. Secondly, let's talk about how globally we seem to be on the cusp of a mini rate hiking cycle, largely of course due to rising energy prices. And lastly, let's talk about the very interesting uh thing that happened in Japan last week. That is to say, there was an intervention in the yen. And not just that, the Japanese government actually suggested that they were open to intervening into the crude oil market. All right, starting with the economic data. Uh so last week we got GDP data and it was a little bit weaker than expected but still a very decent 2%. Now recall last quarter it was a annual rate of 0.5%. Largely due to the government shutdown. So the 2% is kind of a return to norm although I think many expected a larger bounce back. One thing to note though is that just like the low growth in population or no growth in population is impacting labor market standards. So it is for GDP such that because we have less population growth, we're going to have to be accustomed to way lower GDP growth rates uh simply because there are um fewer people entering the labor force. Now when people look at GDP, they also look at what's considered to be more of a core measure. So uh private sales, private final sales domestic consumers, and that was also a pretty solid number. So overall GDP data was totally fine. Also note though that a lot of the GDP growth is in AI stuff. So looking into the details, a big component of GDP growth was business investments and that's just all the data centers that are going up. So absent the big data center buildout, the GDP number would be noticeably worse. Last week we also got PC inflation and it's 3.5% obviously much higher than 2% and if you look at a time series it's definitely moving farther and farther away from 2% and should the oil shock continue it will move um notably higher. So we are in a place where we have okay GDP growth largely due to AI but also inflation that's higher. So that's going to impact monetary policy.

Now the big market moving event last week though of course were MAG7 earnings which overall were pretty mixed. You have Meta that was deeply disappointing to the market and you had Google which the market loved and you saw their share prices surge. Now when you think about stocks a big bull case that I hear is basically that earnings are growing and that's actually true. According to reports so far earnings are growing much higher than they've been in many years. And so the argument is that as earnings grow obviously stock prices should rise as well. Totally reasonable. But another way to look at this and this is what some bears would say is that free cash flow is very low. What that means is that although companies are making a lot of money, they're taking all that money and basically buying data center stuff. Uh since of course most of the earnings are with the big tech companies anyway. So at the end of the day, the money is not really trickling to the shareholders in the form of buybacks like it would used to, but it's all going on to be spent on data centers, which if they turn out to be very successful, could produce a very high rate of return and thus acrue to shareholder value or if it's uh ends up being something that is you know not able to generate lots of money maybe because of competition in AI models and so forth and it's uh basically going to be a lot of money that's wasted. One thing to note though is that a lot of the spending is simply just inflation. If you look at RAM prices for example, looking at DDR5, RAM prices for DDR5 have quadrupled over the past couple years. So this is obviously due to the AI boom, tremendous demand for memory chips and also constraints in supply. So although um the hyperscalers are spending more and more money, a lot of it is just because everything is getting more expensive which is very good for the semiconductor companies like Nvidia and that is why you see the socks index absolutely surging. Uh but it is something to keep in mind that uh in terms of uh real goods and services what you're purchasing is uh maybe not even increasing. So now if you're spending all that free cash flow on AI, you have a couple direct threats. One is that of course AI investments don't actually be as profitable as you hope. But secondly, you don't have as much uh share buybacks. Now uh over the past week, there was a very interesting interview from Paul Tudtor Jones. It was actually recorded in February, but he actually was had a bare case and he he seemed to be bearish on the market and his uh thesis was that you have a lot of equity supply coming online. So that could be in in the form of uh vested vesting shares finally unlocked so people can sell them. It could also be let's say the big IPOs coming up say from Anthropic or um Open AI or SpaceX or something like that. So if you think back to the.com boom, one of the reasons why uh the.com boom kind of faltered was that there was this tremendous increase in IPOs again basic supply and demand, more share to be sold, lower share prices. So uh in the past when you had these Mac 7 guys give share to their employees and their employees sell them, they were basically neutralized by tremendous amounts of share buybacks because all the money is being sent on AI. And not just that, Meta also is borrowing tremendous amounts of money from the debt markets to fund the AI boom. Uh there is more of a supply and demand mismatch, but we'll see what's happening. Of course, I do see that the NASDAQ is making all-time highs seemingly all the time.

All right, the second thing we want to talk about is that we seem to be on the cusp of a global rate hiking cycle. Now just following up on the last point when these market moves reverse it's not you know it's many things happen but one of the necessary conditions historically speaking is higher interest rates. Uh you saw that of course in 2022 and in the do and in 1920s and so forth. So, if you look at market pricing, let's look at the 5-year yield um in Euroland, in the UK, uh in Japan, you can see that since the start of the war in Iran, rates on the 5year specimen have gone higher and that's the market pricing in rate hikes in those countries. In the US, it's a little bit different. We are a dualmandate central bank and so we also have to come uh look at employment. But what happened in the US was instead of pricing in rate hikes which it did very briefly it priced away rate cuts. So also a hawkish reaction and this kind of uh market reaction is totally reasonable because if you look at spot oil it continues to trend higher and that is uh feeding into higher inflation forecasts. Looking at the Bank of England for example their inflation forecast moved up by one percentage point. their most recent meeting they had one descent suggesting that the Fed the Bank of England should be hiking rates. uh they seem to be taking a more wait andsee attitude because from their perspective uh it seems like uh even though oil prices are higher they are worried about they are less or at least a little bit unsure whether or not it will pass through to inflation because the labor market is weak and the economy is weak and that suggests to them that maybe uh the companies might not be able to raise prices and maybe workers might not be able to uh demand higher wages. They call this uh second round effects. This was also something that was mentioned by Madame Lagard at the ECB. Let's listen to a clip here. >> Uh by June we will have um a lot more information that will help us revisit, assertain, verify to see whether or not we have second round effects. And as I said the the the the number of um indicators will include many many uh elements from the wage setting the hiring uh the uh selling price revisions the commodity prices I should have mentioned that one first commodity commodities prices because it's both oil and gas but also all the derivative and everything that um is is actually channeled through the straight or formers in particular. >> So the ECB also did not hike rates last week but they did uh seem to suggest that they are there was a discussion and they could possibly do this in June. Uh just like the UK they are wondering whether or not the increase in oil prices would actually feed through uh to the economy in a sustainable way and higher that produces sustainably increased inflation then they might want to lean against that. Last week we also had a meeting from uh the Bank of Japan and there were actually three descents with the Bank of Japan meeting. They were all so the Bank of Japan did not do anything with their rates and the three descents seemingly were more hawkish. Now if you look at the forecasts from the Bank of Japan, you also see that they also raised their inflation forecast for 2026 by about a percentage point. Now um as far as oil is concerned the US as we all know is a little bit more insulated a lot more insulated um and the most exposed are the Asian countries like Japan which basically imports all their oil. So as oil prices increase it very directly feeds into their inflation uh expectations or actually uh headline inflation. It also impacts Euroland get Euroland a little bit more insulated than the Asian countries. Um but still very much exposed uh especially of course as they are somewhat reluctant to continue to um have you know Russian energy. Now um if this continues we could so the big big question mark is of course how long does the energy shark endure? If the energy shock were to end tomorrow, straight of Hormuz opens, uh what we're going to see is about a month before the shipments from the street of Hormuz will be shipped to uh to other countries. And during that one month, we'll continue to draw down inventories. And so prices will probably still be elevated, but then the central banks will be able to say that, hey, I see a light at the end of this tunnel, so maybe we don't have to react. Maybe this is just something that's transitory that everyone can look through. the risk is that the street of Hamuza actually just stays shut for maybe another month, two months, three months and should that happen uh there is there's no way they can look through it. So they'll definitely have to hike and not just them I feel that the Fed will have to hike as well as we discussed last week we already had uh three people just kind of doing some very cowardly descents and not liking the language. Uh but if oil prices really do surge and it's not just oil prices, it's petrochemicals and of course things like fertilizers which suggest higher food prices, they'll have to act as well. Now it may not have much of a impact. Uh but the central banks again it's not about what actually will happen or how the world actually works. It's about the game is about guessing what the central banks think and from their framework they'll have to do something.

Uh, as we as we're as we record, it doesn't seem like there's much movement as to the straight of Hormuz. Uh, reports suggest that maybe President Trump would just want to have a siege and try to outlast the Iranians, thinking that their economy will implode. Um, I've read an extensive amount of experts on the Middle East and political analysts and so forth, and not a single one believes that to be true. Everyone seems to believe that Iran has a much higher pain threshold. It's also possible that military scripes could resume to put additional pressure. There is a lot of reports that additional arms and stuff are being moved to the Middle East. So, uh we'll see what happens. At the moment, it does not seem like the sh of Parmus is open going to be open anytime soon. One calendar date to keep in mind is that in two weeks, President Trump will be meeting President Xi in China and President Trump also spoke to President Putin last week. So maybe there could be a diplomatic solution involving Russia and China. It may have to involve uh the US maybe uh pushing Ukraine to surrender and maybe uh telling the world that Taiwan is a weward province of China, but we'll see. All right, the last thing that I want to talk about is the super interesting thing that happened in the Japanese yen. So last week, uh it looks like the Bank of Japan finally jumped in to intervene. So if you look at a chart of the Japanese yen, it looks obviously it's been weakening relentlessly in large part because monetary policy is too easy there. Inflation is say 2 3% and yet at their interest rates are below 1%. So in real terms interest rates are very low and so obviously the currency is going to continue to depreciate. Now the bank of Japan has basically drawn a line in the sand of 160 USD JPY. In the past, a couple years ago, they spent about a hundred billion dollars intervening to protect that. And that did buy them a lot of time. But as you see from the chart, the market just keeps pushing the USD JPY higher and higher, keeps selling the yen because it just doesn't make sense, right? The yen is just too weak because interest rates are too low. Now, the latest impetus is of course the oil price shock. Everyone uh understands that Japan imports a lot of oil. So that is a headwind to the Japanese economy both stagnation and higher infl economic growth and higher inflation. And so the market has been challenging that and looks like the bank of Japan jumped in and uh spent about I think spent maybe $30 billion trying to intervene in the market and uh this is something that is is basically going to be uh an unwininnable battle until they finally finally hike interest rates which they might do in June. So that was I think always to be expected from the markets. One interesting thing to note is that in commentary the Japanese government also mentioned that they were willing to intervene in the oil market. Now the comment suggests that they perceive a linkage between higher oil prices in a weaker yen. Totally makes sense and of course they say that there's just a lot of this is speculation. So you know maybe they can go in and check the market. Now if you look at the price of crude oil futures, you do see it's seemingly going parabolic on Thursday and then just kind of imploding. Uh nobody knows if the Japanese government did in fact intervene. Hope maybe some other government intervene. This is of course a global problem that um a lot of interested parties a lot of parties have interested in and would be willing to do and have the capability of doing. So, you know, it's it's not impossible that you could have more sovereign intervention in the financial markets to try to um I guess buffer the uh the impact of the Middle Eastern war. Um some people would say that, you know, you you can never intervene the market or so forth. This is not good. But but the truth is that you know, in setting prices for anything like this, part of it is is going to be speculation because you just don't know uh when the war will end. So being active into market you can obviously shape perceptions that ultimately shape actual prices. Now if the war doesn't end actually oil goes even higher the governments that intervene will sit on losses but really they they have a lot of money so they they probably don't care. So um who knows maybe part of the reason why the stock market and everything else is so resilient is that you also have sovereign intervention. uh I have no idea but it is something that I would not put it past the governments because this is of course a matter of national security and their economic policy. All right so that's why I prepared for today. Thanks so much for tuning in again very very exciting times. I continue to think that um I think that the market is underappreciating the economic impact of this huge energy shock and we really do are just have been the economy has been nuked and we really are just uh feeling fine until one day maybe the stocks draw down faster than expected. oil could shoot up very quickly and then even then it will take time after the war ends to um for supplies to normalize. All right, talk to you guys next week.