European Markets Struggle, US Markets Positive After Slow Q1 GDP | Daily Market Analysis

Key events:

• USA - Core PCE Price Index (MoM) (Mar)
• Canada - GDP (MoM) (Feb)

Although there have been a number of positive earnings announcements, European markets have faced difficulties gaining momentum yesterday following yesterday's losses. However, there has been some minor buying activity in certain crucial sectors, with consumer staples and financials receiving a boost from strong company updates.

The FTSE100 has not performed as well, mainly due to underperformance in the energy sector and weakness in BP and Shell.

US markets started Thursday positively following the release of Q1 GDP figures, which showed a slower growth rate than expected at 1.1%, despite a strong rebound in personal consumption from 1% in Q4 to 3.7%. On Thursday, the Nasdaq rallied, led by the strong earnings report from Meta Platforms Inc (NASDAQ: META), the parent company of Facebook, which overshadowed concerns over the slowing US economic growth. The S&P 500 communication services index had its biggest one-day percentage gain since February 2022, closing up 5.5%.

In addition to Meta, the index was boosted by Alphabet Inc (NASDAQ: GOOGL), which had reported upbeat results earlier in the week, and Comcast (NASDAQ: CMCSA), whose financial results impressed investors on Thursday. After the regular session, Amazon.com Inc (NASDAQ: AMZN) reported quarterly revenue ahead of estimates and saw a 7.6% increase in after-hours trading.

Following the release of US GDP and claims data, the US dollar has gained ground, and yields have increased, indicating that inflationary pressures in the US economy remain high, while the labor market continues to perform well.

However, the increase in core PCE from 4.4% to 4.9% is slightly worrying for the Fed. Meanwhile, weekly jobless claims fell to 230k from 246k.

These numbers do not eliminate the possibility of the Fed raising rates further, and there is still a good chance of another 25bps increase next week. However, concerns are mounting over the increasing likelihood of banking failures, with First Republic Bank potentially following SVB and Signature Bank. The bank is currently seeking a rescue plan, but as often happens in these situations, restoring confidence is difficult without significant restructuring or recapitalization.

Today morning the Bank of Japan (BOJ) maintained its ultra-dovish stance, indicating that it will "patiently" persist with its yield curve control measures for the near-term, while also increasing its inflation forecast for fiscal 2023. The decision involved keeping the benchmark interest rate at negative 0.1% and continuing the quantitative easing and yield curve control policy.

However, the BOJ also stated that it would conduct a comprehensive review of its monetary policy over the next one to one and a half years, to assess the prolonged accommodative policy's impact on the Japanese economy.

This meeting marks the first monetary policy meeting under new Governor Kazuo Ueda, who recently assumed office. Ueda previously indicated that monetary policy in Japan would remain mostly unaltered in the near future, a sentiment that was reiterated by the BOJ in Friday's statement.

The bank also noted that it would continue with monetary easing until it meets its 2% inflation target, given the "high uncertainties" surrounding the Japanese economy. Following the BOJ's announcement, the Japanese yen weakened significantly, as it signals a dovish outlook for monetary policy and eliminates the possibility of ending the bank's yield curve control measures later this year.

Gold prices declined slightly on Friday, marking the third consecutive session of losses as stronger-than-anticipated US inflation and labor market data reignited concerns of further Federal Reserve rate hikes.

The precious metal is now expected to finish the week significantly below the $2,000 mark, after failing to recoup the level in recent sessions.

On Thursday, gold prices dropped while Treasury yields rose following reports that personal consumption expenditures prices exceeded expectations in Q1 2023. Additionally, separate data showed that initial jobless claims unexpectedly fell over the past week, indicating that the labor market remained robust despite the Fed's anticipation of some cooling.

The data fueled apprehension that inflation would remain elevated in the coming months, leading to more policy tightening by the Fed. Such a scenario would be disadvantageous for non-yielding assets such as gold.