Week Ahead: Central banks take centre stage as Apple and Google could join forces

For the second week in a row the main US stock market indices recorded losses, while European stocks powered ahead, led by the Spanish Ibex. It has been a good quarter for US and European stocks, even though the US is faltering as we move towards the end of Q1. While the Federal Reserve meeting this week is important for sentiment, it is not only the Fed that is driving the markets. Tech stocks are once more in focus as news that Apple will use Google’s Gemini to power iPhone AI features, and Nvidia registered an important milestone: a 10-week winning streak. This means that the recent price swings in Nvidia’s share price have continued to attract buyers, even though the stock is higher by more than 78% this year. 

Apple and Google hope to become AI power house 

The Apple news was a shock for the market, and futures predict a stronger open for the S&P 500 later today. According to reports the deal is in the early stages, but if it comes to fruition, it would be a boost to the beleaguered Gemini, which came under intense scrutiny after its image creating tool was accused of being inaccurate and overly politically correct. Apple is seeking a partner to do the heavy lifting of AI for its new iPhone operating system. This would be a high-profile deal for Google and Gemini, and it could give it exposure to the 2 billion active iPhones in use today. Samsung has also teamed up with Gemini to power some of its AI functionality, so the Apple deal is another vote of confidence in the search engine giant. 

Alphabet has been a laggard within the Magnificent 7 when it comes to stock market performance so far this year, and it is only 1.9% higher year to date, lagging the S&P 500, which is higher by more than 7%. This could boost Alphabet’s share price in the short term; however, any deal could also come under regulatory scrutiny, which may limit the potential upside. 

Nvidia’s tech conference could determine what stocks do next 

Elsewhere, Nvidia’s GTC developers conference kicks off on Monday and it is expected to showcase the company’s new line of processing chips, which CEO Jensen Huang has called a transformative moment in AI. Little is known about the B100 chip, but there is a lot of anticipation about a shift to general purpose GPU’s, which could act as another growth engine to boost Nvidia’s already mega sales revenues and margins. The conference comes at an interesting time for Nvidia’s stock price, it has risen by more than 78% YTD, and is also more volatile than bitcoin. If the market is impressed by the latest chip offering from Nvidia, then some analysts are calling for this stock to reach $1000, currently it is trading at approx. $878. 

The Bank of Japan: to cut or not to cut…

The market is going to be firmly focused on central banks this week, although only one is expected to do anything. In Japan, he market is expecting the Bank of Japan to hike interest rates by 10 basis points and bring an end to negative interest rates. There has been intense speculation that this will happen, however, economists polled by Bloomberg do not agree with the market, and they are looking for no change from the BOJ this week. The market reacted to news last week that Toyota would give their workers the largest pay rise in 25 years, and other Japanese companies like Nippon Steel are also expected to fully meet union demands for wage hikes. This is likely to put upward pressure on inflation down the line, although inflation is expected to fall sharply in February. Some argue that Japan’s economy is not ready for a hike, and the decision is on a knife edge. The yen has been rising this month and is the strongest performer in the G10 FX space so far in March, although it has given back some gains in recent trading sessions, as nervousness about the timing of rate increases impacts the FX market.  If the BOJ fail to tighten policy on Tuesday, then the yen could get crushed and USD/JPY may surge back above the 150.00 level. 

Fed meeting: Jerome Powell’s balancing act 

The Federal Reserve meeting is the main event this week. Analysts expect no change to interest rates at this meeting, however, the focus will be on the FOMC’s latest economic forecasts and the Dot Plot, the quarterly depiction of FOMC members’ interest rate forecasts. There are four things to watch out for in this meeting: 

1, The dot plot:  will FOMC members stick to the 3 rate cuts expected? Or could they drop down to 2 rate cuts for this year? Inflation has beaten forecasts in the last two months, although some of that is down to seasonality. Expectations for Q1 GDP remain strong at 2.3%, according to the Atlanta Fed’s GDPNow model. This is down from a 2.5% rate earlier in March. However, there have been more downside surprises in US economic data in the past month, than upside surprises, suggesting that US economic growth could be coming off the boil. It is difficult to argue that financial conditions are tight, with the US stock market rising more than 7% so far this year, and 10-year Treasury yields falling more than 70 basis points since their peak in October, just below 5%. This could support a reduction in the number of cuts the Fed thinks it should make this year. However, on the other hand, credit card delinquencies are rising, retail sales have been soft so far this year and commercial real estate is struggling. If the consumer starts to show deeper cracks, then we think the Fed will react. This is why the FOMC growth forecasts are also worth watching, along with the expected trajectory for inflation. Powell may also sound worried about growth in his press conference, which could be considered dovish. 

2, The neutral rate: this is the long-term interest rate, which is not considered stimulative or restrictive, and is ultimately where the Fed is expected to get to once they start cutting rates. The market sees the long-term rate at 3.5%, higher than the Fed’s last prediction in December. If the Fed upgrades its forecast for the neutral rate, this could be considered hawkish. 

3, Quantitative Tightening: the Fed is also trying to shrink its balance sheet. No changes are expected in QT until May, but if the Fed signals a slowdown in the pace of reducing its balance sheet, then this could also be seen as dovish. 

Overall, it is very challenging trying to decipher conflicting economic signals. The US and global economy are more inflationary in the post-pandemic world, and this makes the path for policy even more difficult to predict. This is why we expect the market to react strongly to this week’s FOMC meeting, and there could be plentiful volatility for stocks, bonds and the dollar. Fed chair Powell also has a difficult balancing act: he doesn’t want to say that the war on inflation is over, and the Fed can cut rates with abandon, yet he also needs to signal when the rate cutting cycle might begin, as the markets want clarity. This is an unenviable task. 

The Bank of England: no change expected 

The BOE is not expected to change policy this week, however, last week’s decline in wage growth could see a dovish shift in voting intentions at the BOE. While we expect there to be a split in the vote, we don’t expect anyone to vote for a hike this week, which could suggest that the start of an easing cycle is getting closer. UK inflation for February is also expected to be below the BOE’s forecast rate when it is released on Wednesday. A big decline isa expected in both headline and core inflation, which are expected to fall to 3.5% for headline, 4.6% for core, and even service prices are expected to decline sharply to 6% from 6.5% in January. However, the increase in the monthly rate of headline inflation is expected to remain high at 0.7%, which could keep the BOE wary of easing rates too soon. The UK faces some of the same issues as the Fed: elevated post pandemic inflation rates and an unclear economic outlook, which makes it hard to predict when rates will be cut at this stage of the economic cycle. 

China’s property sector in freefall 

Overall, there is a lot for the market to digest this week. Central banks are in focus, but developments in the tech space are also worth watching. Economic data in China was mixed for February. Property investment fell by a larger than expected 9% YoY in February, however, industrial production was stronger, growing at a 7% annual rate. Retail sales were decent at 5.5% YTD YoY. The outlook for China is also unpredictable, but the persistent weakness in the property sector remains a worry. 

Germany: another contraction expected in Q1

Germany is expected to register another quarter of negative growth in Q1, according to economists surveyed by Bloomberg. We will be keeping an eye on the German ZEW survey and the IFO survey that are released this week, to see if there are any signs of green shoots in the economy in March.