AI, BoJ Hike & Fed Framework

Good Afternoon. The market recorded its strongest start to a presidential term since Ronald Reagan took office in 1985. This week's major earnings were strong and beat expectations, which helped markets continue to rally.

• Executive Orders: Below is the summary of key executive orders signed by President Trump in his first week in office.

  

  Source: The Indian Investor

• Significant Earnings Next Week: Next week is crucial with key tech companies reporting earnings. Based on the good earnings reported in the last few weeks, I expect the trend to continue.

• Bank of Japan raised interest rates: BoJ avoided the mistake from last July when it surprised the markets with a sudden move that sparked fear of carry trade unwinding and sharp declines in Japanese and global stocks. This time, the BoJ gave clear hints to the market a week before the meeting, which helped price the reaction over time. Check the Aug 11th newsletter here for details of the market panic caused by yen carry trade fears.

• Rotation Into European Stocks: Compared to mid-2024, Bank of America’s latest global fund manager survey shows a remarkable shift toward Europe, with respondents’ European weighting seeing its most significant monthly increase since 2015 and the second-largest on record. Notably, this survey predates Trump’s assumption of office and the optimism stemming from his initial failure to impose new tariffs on the European Union. European equities are undervalued compared to the rest of the world, especially the US.

  

For the week:

• The S&P 500 is up 2.76%, the Nasdaq is up 3.19%, and the Dow 30 is down 2.95%.

  

  Source: Barchart

CNN's Fear & Greed Index now stands at 49 (Neutral) out of 100, up 11 points from last week. Details here

The top five trending stocks on Reddit are Nvidia, SPY, Tesla, AMD, and Microstrategy. Read More

Summary of this week’s key economic releases:

• Flash US PMI® data indicated continued growth in business activity for January, though the pace of expansion eased from December's 32-month high.

• Manufacturing returned to growth after six months of contraction, while the service sector maintained expansion at a slower rate.

  

Target Rate Probabilities for Jan 29th FOMC Meeting:

There is almost no chance of a rate cut in the next meeting.

CME FedWatch

AI Investment: On Tuesday, U.S. President Donald Trump announced a private sector investment of up to $500 billion to accelerate infrastructure development for artificial intelligence, aiming to surpass rival nations in this critical technology. He revealed that OpenAI, SoftBank, and Oracle are launching a joint venture called Stargate, which will establish data centers and create over 100,000 jobs across the United States. Read

New Crypto Working Group: U.S. President Donald Trump has directed the formation of a cryptocurrency working group to propose new regulations and evaluate the establishment of a national cryptocurrency stockpile, advancing his commitment to reform U.S. crypto policy swiftly. Read

TikTok: According to sources familiar with the discussions, the Trump administration plans to secure TikTok by involving Oracle and a consortium of outside investors to assume control of the app's global operations. Read

BoJ Rate Hike: BOJ raised the short-term policy rate 25 bps to 0.5% from 0.25%, its highest level since the 2008 financial crisis, and upgraded its inflation forecasts, signaling confidence that wage growth will sustain inflation around the 2% target. Read

Stocks Most Expensive vs. Bonds: US equities have reached their highest valuation relative to government bonds in a generation, fueling concerns among some investors about the lofty valuations of mega-cap technology stocks and broader Wall Street markets. Read

Source: Bloomberg, FT

Netflix Beat: The streaming giant's investment in sports drove a record 18.9 million subscriber additions in the holiday quarter, further widening its lead over competitors. On Tuesday, the company announced price increases in key markets like the U.S., signaling a shift from subscriber growth to prioritizing revenue and other performance metrics. Read

Source: Appeconomyinsights

Johnson & Johnson Beat: JNJ exceeded Wall Street estimates for fourth-quarter revenue and profit, fueled by robust sales of its cancer treatments. Following its 2023 spinoff of the consumer unit, the company has pursued aggressive acquisitions to strengthen its pharmaceutical and medical device segments. Read

Procter & Gamble Beat: P&G quarterly estimates for sales and profit on Wednesday, as demand for its dish soaps and toilet paper grew in the United States. At the same time, the China market showed signs of recovery after a few rough quarters. Read

Intuitive Surgical Beat: ISRG surpassed Wall Street's fourth-quarter profit estimates, fueled by robust demand for its surgical robots used in minimally invasive procedures. Read

American Express Beat: Amex exceeded fourth-quarter revenue expectations on Friday, driven by increased card usage for travel and online shopping during the holiday season. CFO Christophe Le Caillec highlighted travel and entertainment as key growth areas, with airline travel performing exceptionally well.

“We also saw record levels of annual card member spending, record net card fee revenues, and a record 13 million new card acquisitions, and we continued to add millions of merchant locations to our network globally,” he added. Read

Off-Exchange Activity:
Off-exchange trading, conducted internally at major firms or through alternative platforms like dark pools, is set to reach a record 51.8% of traded volume in January. Unless an unexpected decline occurs, this will mark the fifth consecutive monthly record and the third straight month where hidden trades account for over half of all trading activity. These venues enable institutional investors to minimize information leaks to the market, preventing adverse price impacts.

Bloomberg

The Fed’s Monetary Policy Operating Framework:
This week in my blog, I wrote about the evolution of the Fed’s monetary policy operating framework. The Fed moved from a scarce reserve operating framework or corridor system (before the GFC) to an ample reserve framework or floor system—the blog details why this change was necessary and how the Fed made ample reserve framework work by introducing two new facilities, i.e., ONRRP and SRF. Below is the timeline: