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EU economy expected to avoid recession in Q1

European markets just about managed to eke out a gain yesterday, although the FTSE100 slipped back largely due to weakness in the energy sector.

US markets underwent a much stronger session with strong gains across the board led by the Nasdaq 100, with most of the strength coming from Big Tech as earnings have by and large come in above expectations.

This strong session in the US is expected to see European markets open higher later this morning.

Amazon followed in the footsteps of a strong performance from Meta Platforms with a similarly strong set of Q1 numbers after US markets had closed last night, with outperformance across all its key business areas.

When Amazon reported its full-year results 3 months ago their guidance was somewhat conservative, saying they expected to deliver revenues between $121bn and $126bn, which was slightly on the lower side of forecasts of $125.5bn.

Last night's numbers saw net sales come in at $127.4bn, a 9% rise from the same quarter a year ago. North America saw sales rise by 11% to $76.9bn no doubt helped by the strong rebound in US retail sales we saw in January.

Operating expenses saw a big fall in Q1, from levels of over $60bn in Q4, falling to $54.79bn, as headcount declined, although they are still higher from a year ago. Q4 does tend to be the highest quarter for spending given temporary hiring in the lead-up to Thanksgiving and the Christmas period.  

We also saw a strong performance from AWS as cloud services saw revenues rise by 16% to $21.4bn. Profits came in above expectations at $3.2bn or $0.31c a share, despite another small write-down from its Rivian stake of $500m.

On Q2 guidance the picture was equally upbeat with net sales forecast to come in between $127bn and $133bn, a rise of between 5% and 10%, however there was a warning about future crowd growth, which tempered gains after hours.

The strong gains in US markets came despite a slowdown in Q1 GDP to 1.1% and a bigger-than-expected rise in Q1 core PCE to 4.9% from 4.4% in Q4.

The continued strength seen in the big tech stocks this week is no doubt a relief for investors who feared that the numbers would disappoint, however, they also come against a very low bar. These estimates came from very low expectations at the start of this year when energy prices were higher. With the sharp falls that we’ve seen in energy prices seen since the start of the year, some of the pain on consumers' wallets has eased despite stickiness in core inflation, meaning that companies have by and large been able to pass on price rises without too much of a drop in volumes. When the penny finally drops with respect to this, perhaps the gains this week might start to run out of steam.

Nonetheless, the rise in US treasury yields yesterday, with the US 2-year yield rising back above 4% suggests that we still expect to see another 25bps rate rise from the Federal Reserve next week, which in turn could prove to be a headwind for US stocks.

Today’s PCE core deflator numbers for March are likely to reaffirm that expectation with an unchanged reading of 4.6%, although yesterday’s Q1 PCE numbers suggest that this number could come in higher, while the PCE deflator is expected to fall from 5% to 4.1%.

Personal spending is expected to slow to -0.1% from 0.2%.

In Europe it’s a big day for Q1 GDP with a degree of optimism that the German economy might avoid a technical recession after a rebound in services helped to offset a weak manufacturing sector.

In Q4 the German economy shrank by -0.4%, however, a mild winter has eased the pressure on the German economy, and it could eke out a 0.2% expansion.

The French economy managed to follow its 0.1% expansion in Q4 with growth of 0.2%, while the Italian economy is expected to grow by 0.1%, also avoiding a technical recession.

The Spanish economy is also expected to grow by 0.3%.

EU GDP is expected to rebound from the -0.1% contraction seen in Q4 and grow by 0.2% in Q1.

Earlier this morning Kazuo Ueda oversaw his first meeting as the new Bank of Japan governor and decided to leave monetary policy unchanged, which wasn’t a great surprise. There had been an expectation that he might offer clues as to a possible pivot or tweak on the bank's yield curve control policy given that core inflation is at a 40-year high of 3.8%.

In Asia, the Bank of Japan kept monetary policy unchanged but dropped its forward guidance expectations that rates would stay at current or lower levels, although it offset that by saying that loose monetary policy would remain for as long as necessary to maintain its 2% inflation target.

EUR/USD – currently struggling to overcome the 1.1100 area, however, dips are hard to come by for the time being. A move through 1.1120 is needed to signal further gains. Below 1.0940 retargets the 1.0870 level.

GBP/USD – feels like it wants to go higher but continues to struggle above the 1.2500 area. The support at the 1.2340 area needs to hold to keep the bias for a move towards 1.2630 intact or risk a move towards 1.2270. 

EUR/GBP – another failure at the 0.8875 area for the third day in a row, has seen the euro slide back with a break below 0.8820 targeting trend line support from the August lows at 0.8770. A break above the 0.8870 area suggests a retest the March peaks of 0.8925.

USD/JPY – while below the recent peaks at 135.20 the bias remains for a move towards 132.00. Above 135.20 retargets the 200-day SMA at 137.00.


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