Weekly Market Wrap | 29 July 2023

#TechEarnings #RateHike #SingaporeInflation

#TechEarnings #RateHike #SingaporeInflation

Major tech companies publish Q2 results

Returns chart for major Tech Stocks (Source: Google Finance)

The second quarter of 2023 saw the Magnificent Seven tech giants – Meta, Alphabet, Microsoft, and Tesla – release their earnings reports, showcasing their performances and growth strategies in the current economic landscape.

Meta, formerly known as Facebook, displayed a strong network effect moat source as its user base across all apps increased, and engagement remained healthy. Advertisers showed confidence in Meta’s enhanced and artificial intelligence-powered campaign planning and measurement capabilities. With total revenue reaching $32 billion, Meta reflected faster revenue growth and strong long term margin.

Alphabet, the parent company of Google, reported solid performance driven by growth in search, cloud, and a turnaround in YouTube. Google’s core search business displayed a strong network effect moat source, and YouTube’s ad revenue returned to growth due to improved monetization and increasing demand for ads on connected TVs. Total second-quarter revenue reached $74.6 billion, up 7% from last year, with advertising revenue returning to growth after two consecutive quarters of decline.

Microsoft delivered strong fourth-quarter results, with Azure and Microsoft 365 performing well. Cloud revenue increased 28%, driven by Azure strength, and AI demand materialized, positioning Microsoft as a clear leader in the field. With total fourth-quarter revenue reaching $56.19 billion, Microsoft’s fair value estimate was lifted to $360 per share, maintaining its attractiveness for investors.

Tesla, on the other hand, faced challenges with declining profit margins due to ongoing price cuts. The company responded to slowing demand by reducing prices, leading to three consecutive quarters of lower average selling prices and automotive gross profit margins. While management indicated the possibility of further price cuts later in the year, they expect prices to stabilize as economic conditions improve.

As these tech giants navigate evolving market conditions, investors closely monitor their performances and growth strategies in the highly competitive technology landscape.

Fed increases interest rate by another 25 bps

Fed Interest Rates

What Happened?

In a move that surprised some market observers, the Federal Reserve raised its key interest rate by a quarter point, bringing it to a range of 5.25% to 5.5%. This is the highest level in 22 years. Despite a recent pullback in inflation, the central bank signaled that another rate hike is likely in the coming months, citing a solid economy as the driving factor behind their decision. 

Why did it happen?

The decision to raise interest rates came amidst concerns about inflation. Though inflation slowed down in June, Federal Reserve Chair Jerome Powell cautioned that it was just one month of data and the process of bringing inflation back to the Fed’s 2% target still has a long way to go. The labor market, however, continues to be strong, and the Fed aims to balance supply and demand to prevent another surge in consumer prices. 

Economic growth has been moderate but showed signs of strengthening, leading the Fed to believe that the economy could handle another rate hike. The central bank had previously paused its rate increases in June to assess the impact of its aggressive strategy to combat pandemic-related inflation, which had reached a 40-year high of 9.1% a year ago.

Implications for the investors

For investors, the decision raises questions about the future trajectory of interest rates. While Goldman Sachs believes this rate hike might be the last, the resilient economy and stock market could persuade the Fed to implement another rate increase. The positive economic backdrop may lead the central bank to continue its efforts to tame inflation without triggering a recession. 

Investors should closely monitor economic indicators, inflation reports, and job numbers to gauge the Fed’s future actions. The Fed’s commitment to achieving its 2% inflation target and balancing economic growth may impact investment strategies, particularly in assets highly sensitive to interest rate changes (example: fixed income). 

Singapore core inflation comes down to 4.2% YoY

Singapore Core Inflation

Singapore’s core inflation rate continued to decrease, reaching 4.2 per cent year-on-year in June, according to official data released on Monday (July 24). This decline follows a spike to 5.5 per cent in February and January, the highest in 14 years, before gradually dropping to 4.7 per cent in May. 

The decrease in June was mainly attributed to lower inflation in food and services, excluding accommodation and private transport costs. Overall inflation also eased to 4.5 per cent year-on-year in June, down from 5.1 per cent in the previous month, driven by a decline in private transport inflation as well.

All sectors experienced a decline in inflation during June. Food inflation eased to 5.9 per cent, services inflation fell to 3.6 per cent, and inflation for retail and other goods edged down to 2.7 per cent. 

Additionally, electricity and gas inflation decreased to 3.1 per cent, while accommodation inflation fell to 4.5 per cent as housing rents rose more slowly. Private transport inflation also saw a decline, dropping to 5.8 per cent in June.

The authorities, including the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI), noted that global supply chain frictions, energy, and food commodity prices have moderated, leading to a decline in the prices of imported goods.

Looking ahead, MAS and MTI expect core inflation to moderate further in the second half of 2023 due to falling imported costs and easing domestic labor market tightness. They project headline inflation to average between 4.5 per cent and 5.5 per cent for the year, while core inflation is estimated to average between 3.5 per cent and 4.5 per cent.

IndexLevel1 Week1 MonthFrom Jan 1 2023
S&P 500 (US Stocks)4,582+0.85%+4.23%+19.82%
Nasdaq 100 (US Tech Stocks)15,751+1.78%+5.43%+45.00%
CSI-300 (Chinese Stocks)3,993+4.98%+3.91%2.70%
Bitcoin (in USD)29,353+0.60%-3.62%76.77%

Source: Google Finance, Bloomberg, Yahoo Finance, Reuters, Business Times, CNN, Morningstar

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