Last week, the stock markets were in a bad way when a rather brutal turnaround occurred in the United States. This change was fueled by an upheaval in the Fed's monetary policy narrative. At this stage, I wouldn't venture to call it a 180° turn, but the movement seems powerful enough to reemerge a concept that had been buried a few months ago: the "Fed Put." Wow, what's he talking about on a Monday morning? I'll try to be didactic so as not to lose anyone along the way. Last week, three important things happened on the stock market from Wednesday onwards. In no particular order:

  • Apple released some not-great-but-not-awful figures while at the same time unveiling an XXL share buyback program. The announcement buoyed the indexes, but it's almost history compared to the rest.
  • The US central bank left rates unchanged (as expected), abandoned the threat of a more punitive monetary policy (slightly less expected), and scaled back its quantitative tapering (QT) program (unexpected). QT is the mechanism by which the Fed lightens its balance sheet after years of buying up boatloads of bonds to support the economy. The amount of the program has now been roughly halved, which means that the central bank is slowing down the lightening of its balance sheet, which de facto allows it to leave more liquidity in the system.
  • Several US statistics were down on the week. The Chicago manufacturing PMI was down, consumer confidence deteriorated, and the ISM services index returned to contraction. But above all, it was the downgrading of the monthly employment report that left its mark, with a rise in the unemployment rate, fewer job creations than expected, and a lackluster rise in hourly wages. In the small print of the report, we could also read that SMEs were hiring significantly less, and that cyclical sectors had far fewer job openings. In short, the situation seems to be deteriorating on the labor market front, which is one of the Fed's most closely watched indicators.
I'll set aside the Apple event to focus on everything else: the Fed's stance suggests a certain degree of concern, backed by the statistics published over the week. Until Wednesday, the market's main fear was that signs of rising inflation in the United States would delay monetary easing indefinitely. This was even the main justification for the index correction in April. But last week's events seemed to flip the narrative on its head. They have also clearly altered perceptions of the Fed, enough for the central bank to accelerate quantitative tapering. In response, the market anticipates two more rate cuts this year, the first in September (compared with previously expecting one rate cut, possibly in December).

Above all, the Federal Reserve's behavior suggests that the Fed put concept may be resurfacing. Fearing a deteriorating economic situation, Powell and his team are taking a softer stance to maintain market confidence. It's like saying, "Don't worry, we'll cut rates if things go wrong." This posture essentially provides a safety net under risky assets, a practice prevalent throughout much of the previous decade. Market insiders have drawn this conclusion from Powell's surprisingly dovish speech, the decision on quantitative tapering (the Fed is now taking a more active role in the public debt market, thereby freeing up money markets), and the deterioration of several US economic indicators.

In summary, the Fed is once again prioritizing slowing down the economy over combating inflation, so it has adjusted its tools and communications. Equity markets have responded positively to what could be a paradigm shift. However, this scenario still needs validation because we shouldn't overlook the real rebound in inflation in the United States.

News you need to know to start the week:

  • Xi Jinping kicks off his European tour in France, focusing on trade tensions and Ukraine.
  • Israel closed the Kerem Shalom humanitarian crossing to Gaza after a Hamas rocket attack, an incident that could disrupt the ongoing ceasefire negotiations. Meanwhile, the Israeli army reportedly instructed civilians to evacuate Rafah, according to the latest reports this morning.
  • Markets are closed for a bank holiday in the UK and Japan today. Other public holidays (though not necessarily stock market holidays) are scheduled throughout the week.
  • On the macroeconomic agenda, two central banks are set to meet: Australia's RBA on Tuesday and the UK's BoE on Thursday. The ECB's chief economist, Philip Lane, expressed confidence that inflation would return to the 2% target, reinforcing the ECB's expectations of a rate cut in June.
  • Regarding corporate results, while the pace is slowing, several significant news stories are expected this week. These include updates from Walt Disney, BP Plc, UBS, Toyota, and Anheuser-Busch Inbev.

In the Asia-Pacific region, Chinese equities reaffirm their resurgence. The CSI 300 index for Shanghai and Shenzhen gained 1.3% this morning after being closed from Wednesday to Friday. The Hang Seng is slightly more subdued (-0.1%), but had surged strongly last week. Japan and South Korea are closed for a public holiday. India and Australia saw gains of around 0.5%. European leading indicators show bullish signs in pre-opening trading.

Economic highlights of the day:

The PMI services indicators in their final versions are on the agenda for the major economies. Full agenda here.

The dollar falls to 0.9283 EUR and 0.7952 GBP. The ounce of gold recovers to 2321 USD. Oil remains under pressure, with North Sea Brent at USD 83.59 a barrel and US light crude WTI at USD 78.61. The yield on 10-year US debt falls to 4.51%. Bitcoin is trading at 64,000 USD.

In corporate news:

  • Berkshire Hathaway reported record quarterly earnings on Saturday, boosted by a significant increase in revenues from insurance underwriting. First-quarter operating profit rose 39% to $11.22 billion, or around $7,807 per Class A share, compared with $8.07 billion a year earlier.
  • Apple fell by 1.1% before the opening, after Berkshire Hathaway said on Saturday that it had reduced its stake in the group by 13%, selling off around 115 million Apple shares.
  • Biontech - The German laboratory, which has developed a vaccine against COVID-19 with Pfizer, announced in a press release on Monday that it was still targeting revenues for this year in the range of $2.69 billion to $3.34 billion.
  • Novavax dropped 2.2% in pre-market trading, as hedge fund Shah Capital announced that it had urged shareholders to vote against the election of three directors to the laboratory's board.
  • Paramount Global will end its exclusive negotiations to be acquired by Skydance Media without reaching an agreement, according to a person familiar with the discussions. Paramount was up 4.7% before the opening.
  • Exxon Mobil estimated on Friday that it would take 18 to 24 months to achieve the desired production synergies following the group's takeover of Pioneer Natural Resources.
  • Perficient - The digital technology consulting group soared 54% in pre-market trading following the announcement of its takeover by Swedish fund EQT for around $3 billion.
  • KKR is to buy Indian medical equipment manufacturer Healthium Medtech from British group Apax Partners in a deal which, according to three sources with direct knowledge of the matter, values the company at 70 billion rupees ($838.60 million).
  • Mining groups Newmont, Barrick Gold Sibanye Stillwater, Gold Fields, Harmony Gold and Anglogold Ashanti gained 1.5% to 3% in pre-market trading, in the wake of the rise in gold, which itself benefited from the prospect of a Fed rate cut following the publication on Friday of a US employment report deemed encouraging.
  • Gamestop lost 2.7% in pre-market trading after two consecutive sessions of strong gains, during which the stock gained 51%. However, the share has lost 86% since its 2021 high.

Analyst recommendations:

  • Albemarle: Scotiabank maintains its sector outperform recommendation with a price target reduced from USD 160 to USD 150.
  • Alphabet: Melius Research maintains its hold recommendation with a price target raised from USD 164 to USD 185.
  • Ameriprise Financial: Argus Research Company maintains its buy recommendation and raises the target price from 440 to USD 460.
  • Cf Industries Holdings: Scotiabank maintains its sector perform recommendation with the target price to USD 80.
  • Chubb Limited: Keefe Bruyette & Woods maintains its outperform rating and reduces the target price from USD 297 to USD 294.
  • Cisco Systems: Melius Research LLC maintains its hold recommendation with a price target raised from USD 52 to USD 53.
  • Cloudflare: Susquehanna maintains a neutral recommendation with a price target reduced to USD 80.
  • Draftkings: Argus Research Company maintains its buy recommendation with a price target reduced from USD 54 to USD 48.
  • Expedia Group: Susquehanna maintains its neutral recommendation and reduces the target price from USD 145 to USD 125.
  • Fortinet: Susquehanna maintains its neutral recommendation and reduces the target price to USD 65.
  • Howmet Aerospace: Argus Research Company maintains its buy recommendation and raises the target price from USD 75 to USD 90.
  • Linde Plc: Vertical Research Partners maintains its buy recommendation with a price target reduced from USD 506 to USD 500.
  • Microsoft: Melius Research LLC maintains its buy recommendation and raises the target price from USD 475 to USD 490.
  • Parker-Hannifin: Argus Research Company maintains its buy recommendation and raises the target price to USD 590.
  • Public Storage: Evercore ISI maintains its in-line recommendation and raises the target price from USD 283 to USD 289.
  • Target Corporation: TD Cowen maintains its hold recommendation with a price target reduced from USD 185 to USD 175.
  • The Hershey Company: Consumer Edge Research maintains its equalweight recommendation with a price target raised from USD 211 to USD 215.
  • Vici Properties: Wedbush maintains its neutral recommendation with a price target reduced to USD 31.
  • Walt Disney Company: Loop Capital Markets maintains its buy recommendation and raises the target price from USD 113 to USD 140.
  • Zoetis: BNP Paribas Exane maintains its outperform recommendation and reduces the target price to USD 232.