Early Morning Call: watching USD after release of mixed Fed minutes

Fed minutes

The minutes of the last Federal Reserve (Fed) meeting on US rates were released on Wednesday evening. It showed that the meeting was divided over where to go with interest rates, with some members seeing the need for more increases while others expected a slowdown in growth to remove the need to tighten further.

Though the decision to increase the Fed's benchmark rate by a quarter percentage point was unanimous, the meeting summary reflected disagreement over what the next move should be, with a tilt toward less aggressive policy. At the end, the rate-setting Federal Open Market Committee (FOMC) voted to remove a key phrase from its post-meeting statement that had indicated "additional policy firming may be appropriate."

The Fed appears now to be moving toward a more data-dependent approach in which a number of factors will determine if the rate-hiking cycle continues.

Ratings agency Fitch put the United States' AAA credit ranking on watch for a possible downgrade as the country's debt ceiling talks go down to the wire. Traders are waiting for an indication that lawmakers are making progress so that they can raise the amount that the Treasury can borrow before it runs out of money, which could happen as soon as next week.

The greenback could also move this afternoon at the release of the second estimate US gross domestic product (GDP) in the first quarter (Q1). The market expects the US economy to have expanded 1.1% in the first three months of the year.

Also at 1.30pm, initial jobless claims. The market expects 245,000 new claimants last week.

HSBC

HSBC could be exiting as many as a dozen countries. In a Reuters interview, the newly appointed CFO Georges Elhedery said HSBC's plan is to focus on its Asia expansion. "Some of these will have slower progress than others, and none of them is material enough on its own to change the profile of the overall business, but as we progress through and execute on these assessments, we do expect them to contribute towards that shift to Asia."

Elhedery declined to reveal which markets were under review, but we know the bank's European operations recorded a net loss in 2022. In the last two years, the bank has already triggered planned sales of all or parts of its businesses in France and Greece, but also in Russia and Canada. Latin America could also be targeted: last year the region only contributed 5% of the group's profit.

A few weeks ago, Ping An Insurance, which owns about 8% of HSBC, wanted the bank to separate its Asian and Western activities. Ping An Insurance wanted to prioritise growth in Asia, where HSBC generates 78% of its total profit. It didn't get support from other shareholders.

Earnings

It's been a massive beat for NVIDIA in its first quarter accompanied by a stronger-than-expected forecast. It reported adjusted earnings per share (EPS) of $1.09 versus $0.92 expected, on revenues of $7.19 billion, far higher than the $6.52 billion expected.

But it’s really all about artificial intelligence (AI). AI investments will keep NVIDIA ahead of its semiconductor rivals, according to the company. NVIDIA said it expected about $11 billion, plus or minus 2% in the current quarter, far surpassing forecasts of $1.06 per share on $7.15 billion in sales.

NVIDIA stock has more than doubled this year, so far, mostly driven by optimism stemming from the company's leading position in the market for AI chips. It says it's seeing "surging demand" for its data centre products which reported $4.28 billion in sales, versus expectations of $3.9 billion, a 14% annual increase.

NVIDIA's strong performance in data centres shows that AI chips are becoming increasingly important for cloud providers and other companies that run large amounts of servers.

NVIDIA's report gave a boost to other stocks in the sector. AMD shares gained over 8%. Palantir Technologies, also heavily involved in developing artificial intelligence, rose nearly 4%.

Although past its peak, inflation remains well above the Fed's target, and interest rates are to stay high for some time. In this context, demand for discretionary products remains soft and groups like Best Buy feel the heat. Best Buy is set to report today. The Street expects first quarter revenue to fall by 10.5% year-on-year (YoY) to $9.54 billion. Adjusted EPS are forecast at $1.11, down some 30%.

Another stock suffering from rising costs is Gap. Over the past 12 months, Gap shares dropped 14%. Cost-cutting measures put in place over the period - 500 executives were fired last September alongside a hiring freeze through the end of 2022 - seemed to have supported the stock, which is up 26% over the past six months. But in terms of earnings, this plan is hardly useful. Fourth quarter fiscal 2023 revenue is forecast to come in at $3.29Bln, and an expected loss of 15 cents per share.

But not all retailers are suffering the same fate. Risings costs mean that consumers have been looking for cheaper ways to shop for essentials, and discounters like Dollar Tree have benefited. The stock has risen around 21% in the past 12 months. Dollar Tree had to increase its prices to preserve its margins, but the market is fairly confident it hasn't weighed too much on its sales. First quarter revenue is forecast at $7.27Bln, up 5.4% YoY. Adjusted EPS are forecast at $1.54, up by 35% YoY.

Costco Wholesale is another one to look at. The Street forecast earnings of $3.30 per share on revenue of $54.61Bln after market close.

Commodities

WTI and Brent prices found support in the large and unexpected drawdown in US crude inventories. According to the EIA, crude stockpiles fell by 12.5 million barrels to 455.2 million barrels. Analysts had expected an 800,000-barrel rise.

US gasoline stocks dropped by 2.1 million barrels and distillate stockpiles fell by 600,000 barrels.

This drop in crude stocks reflects the intense refining activity. Refiners are trying to keep up with higher fuel demand. Next Monday, Memorial Day holiday in the US, traditionally marks the beginning of the peak summer travel season.