Market 05/01: May FOMC - Fed keeps rates unchanged + slows QT from June

May FOMC: Fed keeps rates unchanged + slows QT from June.

Key points from the May FOMC meeting:

1- Keep current policy rate at 5.25% - 5.5%

2 - Expected to start slowing QT pace from June.

Currently: Fed maintaining QT pace by selling USD 60B T-bonds and USD 35B MBS per month.
Plan: reduce QT to just selling USD 25B in Treasuries + keep MBS sales at USD 35B per month.

3 - Inflation: lacking progress toward 2% target (as Fed desires).

4 - Economy continues to grow.

Treasury yields (2Y) immediately fall after Fed announces plan to slow QT:

Rate cut expectations drop back to just 1 in 2024 due to concerns inflation will prolong Fed's high rates period.

March JOLTS: Labor market cooling - Job openings and quits rate both slightly down

Job openings lowest since post-Covid - quits rate also down

March job openings fall to lowest since post-Covid 8.488 million (< estimate 8.69M, prior 8.813M) - JOLTS report.

→ Labor market no longer too tight.

Quits rate also falls to 2.1% , lowest since Aug 2020

Job openings/unemployed ratio also falls to 1.32 jobs/unemployed worker…
- …indicating labor market tightness has eased significantly though not yet normalized to pre-Covid levels.

→ Labor market less tense as businesses no longer under pressure to hire more, workers less confident to quit/job-hop.

Notably, 2-year cyclical JOLTS job turnover rate falls to -2.3bps despite not in recession.
- However, job openings down vs 2 years ago simply because hiring surged post-Covid in 2022.

Interest rate-sensitive sectors (construction real estate, finance banking) down - while public sector hiring up

Job openings down most in 2 sectors: construction (-182,000) and finance & insurance (-158,000)…
- …due to real estate and finance/insurance facing more pressure from high rate environment.
While state/local government hiring up (+46,000)
- Job openings in Arts & Entertainment also down significantly (halved in 3 years).

In summary: Job openings + quits rates low but layoffs rate also low currently (chart below)

=> This is quite rare but also a sign that wage growth will slow (as workers jump jobs less) while hiring pace remains steady.

This could also be good news for the Fed regarding soft-landing hopes:
- inflation decreases due to no pressure from wage increases
- but jobs are not lost (no labor recession)

ADP survey shows strong hiring as wage growth cools

ADP report records increase +192,000 April jobs (> expected +183,000)- highest monthly increase since July.

→ Stable labor demand + low unemployment rate → Increased consumer spending → Inflation remains high.

Wage growth slows for both job switchers (9.3% ) and those staying in their current jobs (5%).

Note: ADP survey is not the official labor data recognized by the Fed!

ISM Manufacturing PMI contracts, production costs highest since 2022

ISM Manufacturing PMI April falls to 49.2 (< estimate 50, < previous month 50.3).

Manufacturers continue to face difficulties due to:

New orders slightly down, employment up but still below 50.
Input raw material costs up for 2 consecutive months
→ Persistent inflation pressure.
Prices paid rise to 60.9, highest since June 2022.

Earnings reports: Mastercard, Amazon, AMD, SuperMicro, Starbucks

Amazon ER: Sales surge thanks to AI and advertising

Revenue up +13% YoY, reaching 143 billion USD (> estimate 0.7 billion USD).
Operating margin: 11%, up +7% YoY.
Trailing 12-month free cash flow: 50 billion USD.

AWS:

Revenue up +17% YoY, reaching 25 billion USD.
Operating margin: 38%, up +14% YoY

Q2/FY24 guidance:

Expected revenue about 144-149 billion USD (expected 150 billion USD).

Mastercard ER: Stock falls after guidance cut report

Revenue: up +10% YoY, reaching 6.3 billion USD (> estimate 10 million USD).
Operating margin: 57% (+2% YoY).
Non-GAAP EPS: 3.31 USD (> estimate 0.07 USD).

Fx neutral (growth based on fixed exchange rates):

Revenue up +11% YoY.
Dollar volume: up +10% YoY
Cross-border volume up +18% YoY.
Converted transactions up +13% YoY.

AMD ER: Expect to sell 4 billion USD AI chips this year

Revenue up +2% YoY, reaching 5.5 billion USD (> estimate 20 million USD).
Gross margin: 47%, up +3% YoY.
Operating margin: 1%, up +3% YoY.
Non-GAAP EPS: 0.62 USD (> estimate 0.01 USD).

Q2/FY24 guidance:

Expected revenue ~5.7 billion USD.

SuperMicro ER:

Revenue: 3.85 billion USD, up +200% YoY.
- …thanks to growth in AI, cloud, and storage.
Diluted EPS: 6.56 USD (vs 1.53 USD Q3/2023).
Gross Margin: 15.5% (slightly down from 17.6% Q3/2023).

Starbucks ER: Cuts 2024 guidance due to store sales decline

EPS: 0.68 USD (< estimate 0.79 USD).

Revenue: 8.56 billion USD (< estimate 9.13 billion USD).

Global same-store sales: -4% (< estimate +1%).
- …due to 6% drop in traffic in the quarter.
- In China, same-store sales down -11% YoY, average ticket down -8% YoY.

Growth guidance cut from 7% to low-single digits.

Starbucks stock hits lowest level since June 2022 after earnings report.

Crypto market: Tether reports huge profit in Q1

Tether reports huge profit in Q1:
- Profit of 4.52 billion USD mainly from bonds, Bitcoin, and gold.
- Reserves exceed total USDT tokens issued by 6.2 billion USD.

Other news: Treasury announces buyback plan starting 05/29

Treasury announces buyback program to take place from 05/29.
- Treasury also plans to issue intermediate and long-term debt (3Y, 10Y & 30Y) totaling 125 billion USD next week.

US calls on companies to leave Xinjiang, China due to forced labor concerns. Chinese government vehemently denies the allegations.