PKB's Market Espresso
June 6, 2024

ECB Preview

The ECB looks all but guaranteed to deliver a 25bp cut in its deposit rate at the June meeting – macroeconomic data has been more or less in line with its expectations – no cut would undermine credibility

• No guidance concerning July is likely to be given – message will be that there is no predetermined path – future moves will be data dependent
• As economic activity has gained momentum and wage growth accelerated, ECB will be keen to stress that it will continue to act gradually concerning future moves – within Governing Council there is a lack of consensus for what should be done after June.

Some confort from PCE

• The PCE* is the Fed’s favourite inflation gauge 
• As already explained, the PCE is better suited to timely  capture changes in consumers’ habits 
• The April readings were in line with expectations, both  headline (2.7%) and core (2.8%) 
• Both the equity and bond market reacted positively, as  this further diminishes the risk of a rate hike 
• Yet real consumption data showed a marginal decline
• Nothing worrying, but it could signal some consumer fatigue 
• A healthy deceleration could however be positive if it reduces the risk of rates staying high for longer

US - manifaturing softens

ISM* May factory index fell to three-month low of 48.7 – weakest data in last 3 month, with measure of orders falling the most in nearly 2 years

• Figure indicates US manufacturing is struggling to gain momentum given high borrowing costs, restrained investments and softer spending 
• The ISM* data reaffirmed several trends: decelerating inflation, slower growth and tight labor market
• Bonds climbed on the news as reading fueled speculation that the Fed would have more room to cut interest rates

WIRP Speed

• WIRP is Bloomberg’s model to estimate the evolution of monetary policy around the world 
• The last reading for the US is -1.66 
• A long way from -6.71 in December 23 
• A combination of better growth and more resilient inflation could be a fly in the ointment
• Averaging various Fed speaker’s statements, one could expect no less than one and no more than two cuts for 2024
• Not much manoeuvring room here!

GenAI and Tech Infrastructures

In addition to the outstanding AI chips from Nvidia, servers and memory chips as well as the associated suppliers are the direct winners.

• The fears of investors that the new Nvidia H200/Blackwell chip generation would lead to a decline in sales momentum for the older H100 generation have not materialized. On the contrary: the entire chip range is completely sold out for several quarters. 
• Healthy diversification of sales channels: While data centers accounted for more than half of the sales, this figure has recently fallen to around 45%. 
• Value chain: The increase in computing power and artificial intelligence is expected to increase demand for High-Bandwidth Memories by an average of 68 percent per year until 2030. 
• The total market for accelerated, customized computing power, connectivity and storage to reach $21bn in 2023. By 2028 the market is expected to grow to $75bn.
• Intelligent power systems: Data Centre Technologies is a particularly fast-growing area, because cooling or chilled water supply is essential for data centers and similar industrial AI usage. AI data center market is expected to grow to $46bn in 2032 from $15.2bn in 2023.

Supply chain stress continues

Disruptions to supply chains and conflicts (Red Sea) are tying up capacities and leading to increased complexity in global trade.

• Global demand for sea freight capacity is increasing in what is normally a quiet season for sea freight, clearly an indication of the start of a restocking cycle (especially Asia – Europe). 
• In addition, early peak season demand from North American importers can also be observed – US seaborne imports grew 10% in 1Q24 (y/y) and should continue to rise in 2Q24. 
• The increased demand is being met with delays, congestion, empty container shortages and equipment problems at several ports. Freight forwarders are still faced with capacity bottlenecks. 
• The accident at the port of Baltimore also has an impact on supply chains around the world. The port has a market share of 20% in the distribution of goods in the global automotive sector.
• This is reflected in further significant price increases (read inflation): freight forwarders are not expecting conditions to improve in the short term.