Mixed trading session sees Amazon slump and BOJ maintain policy settings

What’s happened?

Investors witnessed a mixed trading session yesterday, with Asian shares rallying alongside European futures, buoyed by gains on Wall Street. However, the momentum in US contracts was tempered by the downturn in Amazon's stock prices. The Japanese yen experienced its most significant drop in over a week, while JGBs rebounded after the Bank of Japan (BOJ) maintained its policy settings.

Treasuries and the US dollar advanced, indicating a flight to safety by investors. Brent crude oil prices also climbed, in line with the broader risk-on sentiment seen in the markets. These mixed movements underscore the ongoing uncertainty and volatility in the markets, as investors continue to navigate shifting global economic and political conditions.

Yesterday's market performance revealed some notable trends within the tech industry. Amazon's postmarket gains were short-lived, as the company announced that its cloud sales growth is slowing this quarter. This news follows Amazon's previous earnings beat and may suggest that the company is facing challenges in retaining its cloud customer base. In addition, shoppers are reportedly purchasing less expensive items, which could indicate a shift in consumer behavior.

Meanwhile, Intel experienced a 5% rally after assuring investors of a second-half recovery and the widening of gross margins. This indicates that the company is confident in its future performance and is taking steps to improve profitability.

On the other hand, Snap experienced an 18% slump after reporting its first-ever decline in quarterly revenue, which is attributed to recent changes to its ad tools. Lastly, Pinterest tumbled due to mounting restructuring costs and a wider-than-expected net loss, indicating that the company may be struggling to turn a profit. These developments highlight the volatility and challenges inherent in the tech industry.

What to watch?

In a significant move, the Bank of Japan (BOJ) has abandoned its previous guidance on future interest rate levels and has called for a long-term review of its policies. The central bank, under its new Governor Kazuo Ueda, has made adjustments to its forward guidance, removing any reference to the Covid-19 pandemic and its expectation that rates will remain at their current or lower levels.

Moreover, the BOJ has announced plans for a "broad-perspective review" of its policies, which is expected to take around one to one-and-a-half years. This move underscores the central bank's commitment to evaluating and adjusting its monetary policies to support Japan's economy and achieve its inflation targets.

Overall, the BOJ's decision signals a cautious approach to policymaking in the face of ongoing economic uncertainty, and reflects the bank's commitment to maintaining a supportive stance on monetary policy while seeking ways to improve its effectiveness in the long term.

The latest release of the US GDP figures for the first quarter of this year shows a growth rate of 1.1%, which is significantly lower than the 2.6% rate seen in the fourth quarter. However, it is important to note that this decline was primarily due to a decrease in business spending and inventories, and not a result of weakened consumer spending. In fact, personal consumption remained resilient, with a growth rate of 3.7%, significantly higher than the 1% growth rate seen in the previous quarter.

Despite the relatively positive news on the consumer front, there are concerns around the persistently high levels of inflation, which is likely to prevent any rate cuts from the Federal Reserve that the markets were expecting later this year. This will be worse for fixed income than equities. However, there are concerns that if inflation continues to be high, and the consumer buckles, this could result in stagflation, which would have a detrimental impact on equity markets.

With consumers likely to continue spending, at least through June, it appears that the risk of a near-term recession has decreased. For the Federal Reserve, this means a certain quarter percentage-point rate hike next week, taking the upper bound of the fed funds rate to 5.25%, in line with the Fed's projections from the March FOMC.