Markets shrugged off a weak GDP print as strong tech earnings from Meta and Microsoft pushed the S&P to 5,569 to close April on a high. Meta and Microsoft earnings have the market poised for more gains on the day ahead with both beating estimates. Meta continues work on their stand alone AI app to rival ChatGPT and Microsoft’s Azure had an AI revenue boost. Score one for the bots. Massive user bases of both companies are the hopes of AI monetization.
That data showed that 1Q2025 GDP fell by 0.3%, but with so many “one-factors” you could drive a truck through it, and the market did. I mean who cares about pre-tariffs numbers that were so distorted by pre-tariff imports and election related distortions in non-profit spending.
If Data Falls In the Woods And No One Is Around Does It Make a Sound
And let’s face it nobody actually cares about ADP data, they’ll wait for Non-farm payrolls on Friday.
So that leaves inflation, Core PCE was down but still running at 2.65% YoY buoyed by strong spending as people bought cars they feared would be tariffed. The bad news is that consumers may be dipping into savings to pay for things.
Over in bond land, it seems like the stagnant part is beating the inflation part of the tariff narrative for the time being and I haven’t seen as much writing about foreigners retreating from the dollar of late. Whatever the reason, the 2Y yield traded down to 3.61% and the 10Y to 4.18%.
We’ll get more data and more earnings on the day ahead.
As You Await Tariff News You Might As Well Worry About Other Worries
Like unrealized losses on bank balance sheets. Sure I mentioned that at the start of the week, but we’re only 2 years removed from SVB collapse and the Fed mentioned it in their Financial Stability Report and no one cares.
But weren’t we just worried about financial fragility and rising yields at the start of April?
Why should we care about the hangover of unrealized losses sitting on bank balance sheets? I mean the Fed said there is something like $482 billion which is 30% of banks’ regulatory capital, which sounds at least a little concerning.
So what happens in a slowing economy that might see job losses but not see the type of price declines that result in aggressive Fed cuts? Could we see a double whammy of banks experiencing loan losses that deplete capital cushions while at the same time getting no relief on their existing unrealized losses in their fixed income portfolios?
If capital cushions erode and unrealized losses linger, it’s not hard to imagine a smaller regional bank becoming the next headline... just in time for election season.
I don’t know, but it’s definitely not getting much press. Feel free to add your own thoughts in the comments.
XTOD’s:
XTOD: We're not going to cut the deficit, are we The deficit is going to get even bigger, isn't it
XTOD: MSFT - @satyanadella “we processed 50 TRILLION tokens last month.” AI nearly 50% of Azure’s + 35% y/y. Demand is growing faster than supply, accelerated in the Q - expect capacity constraints post June. Trying to get more data center capacity online to satisfy demand.
XTOD: For the first time ever, the Treasury Borrowing Advisory Committee discusses stablecoins as a "new payment mechanism" and a potentially huge source of demand for US T-Bills. Key observations:
1. Stablecoin issuers currently hold >$120bn in T-bills
2. Rapid growth in stablecoins could lead to incremental demand of ~$900BN for T-Bills (size of Bill market today is $6.4TN).
3. If stablecoins experience exponential growth, demand for USTs should be correlated, likely at the expense of bank deposits
4. Stablecoins could grow to $2 trillion by 2030 in response to "continued market and regulatory breakthroughs."
5. Stablecoins could disrupt traditional banks by drawing away deposits.
XTOD: “And it dawned on me that I might have to change my inner thought patterns… that I would have to start believing in possibilities that I wouldn’t have allowed before, that I had been closing my creativity down to a very narrow, controllable scale...that things had become too familiar and I might have to disorient myself.” — Bob Dylan
https://x.com/dailydirtnap/status/1917671974274269490
https://x.com/altcap/status/1917703238419374228
https://x.com/zerohedge/status/1917594997244805503
https://x.com/tferriss/status/1917671025199939676
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