This week's "Markets Weekly" dives into the recent market surge, post-Liberation Day recovery, key economic data, and the significant appreciation of the Taiwan dollar. The host highlights a historic week where the S&P 500 experienced a 9-day winning streak, effectively erasing the losses incurred during April, which the host refers to as "Liberation Day losses."
The equities market experienced a positive week, driven by various factors. These include potential retail investor activity, systemic investor buying, and decreased volatility leading to hedge covering. There were also positive, albeit minor, developments on the trade front with China expressing a willingness to engage in discussions with the US administration.
Big Tech earnings also played a crucial role. Microsoft and Facebook received positive market reactions, while Amazon and Apple's reports were met with lukewarm responses. Apple's earnings call revealed that tariffs cost the company around $1 billion per quarter, although this hasn't significantly impacted their overall profitability, given their share buybacks. Apple is seemingly adapting by shifting iPhone manufacturing to India to serve the US market. A more substantial threat to Apple's business model is the recent court ruling challenging their App Store's 30% transaction fee, which could reduce revenue if developers bypass the App Store for payments.
Other asset classes showed mixed performance. Treasury yields have largely returned to pre-Liberation Day levels, suggesting a reduced probability of a Fed rate cut in June. The US dollar, however, has not recovered its pre-Liberation Day strength, potentially due to policy shifts and concerns about US economic exceptionalism. Oil prices have been declining, with news of OPEC increasing output, potentially influenced by the Trump administration's desire to lower oil prices and combat inflation.
The focus is now shifting to economic data as indicators of a potential US recession. First-quarter GDP data showed slight negative growth, which was due to high import levels driven by companies front-running tariffs. Looking ahead, analysts suggest focusing on "core GDP," defined as final private sales to private domestic consumers, which showed a healthier 3% growth in the first quarter.
Labor market data presents a mixed picture. JOLTS data indicates a softening labor market, with the ratio of job openings to workers declining. Non-farm payroll data exceeded expectations, but there were also downward revisions to previous months. Wage deceleration suggests that wage growth isn't adding upward pressure on inflation. However, there has been a noticeable increase in continuing unemployment claims, signaling a softening labor market and suggesting that individuals are experiencing greater difficulty in securing new employment.
The most intriguing development discussed is the unexpected 3% appreciation of the Taiwan dollar against the US dollar in a single day. Taiwan's central bank attributed this to massive inflows from foreign investors, although speculations abound regarding potential currency accord or back room deal.
Taiwan's persistent current account surplus should lead to appreciation in its currency; however, the Taiwan dollar has not appreciated in the long-term due to the surplus being reinvested in foreign currency assets. Life insurers are purchasing foreign dollar-denominated assets and not hedging their investments due to the stability provided by the central bank. This has left them open to potentially large losses as the Taiwan dollar has appreciated. This situation highlights the evolving global trade order and the shifting dynamics of global capital flows, which could significantly impact countries with large foreign currency reserves.