Markets’ dove-coloured glasses

This is an audio transcript of the FT News Briefing podcast episode: ‘Markets’ dove-coloured glasses’

Marc Filippino
Good morning from the Financial Times. Today is Friday, February 3rd. And this is your FT News Briefing.

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Tech companies had a difficult quarter despite strong demand and central banks raised rates this week. Markets acted like that was dovish.

Katie Martin
The big money managers that I speak to are like, “I do not understand why everyone is so excited.”

Marc Filippino
The FT’s Katie Martin was baffled, too. Plus, we’ll preview the latest US jobs numbers. I’m Marc Filippino, and here’s the news you need to start your day.

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Three big tech companies reported earnings yesterday: Apple, Alphabet and Amazon. And things did not look pretty for them for the fourth quarter of 2022. We will start with Apple, which snapped a streak of 14 straight quarters of revenue growth. The FT’s west coast editor Richard Waters explains what happened.

Richard Waters
Primarily because its supply chain, you know, it was struggling. In China, the effects of the Covid lockdowns really held back its manufacturing and so despite the very strong demand, we had a weak quarter from Apple. And that is very much what we see reflected in the other companies for various reasons across all their markets. It’s quite a weak quarter.

Marc Filippino
Yeah, let’s talk about some of those reasons. What happened with Amazon and with Google’s parent company, Alphabet?

Richard Waters
Digital advertising growth has slowed down tremendously. The other thing — and this definitely is an Amazon story, as well as a Google story, and a Microsoft story — is the cloud computing market, which has been one of the huge growth levers for the entire tech sector, is actually slowing much faster than anybody thought at this stage. And it’s reflecting this rapid deceleration in a really hot market. And the reason for that is that customers just don’t want to spend as much. They’re saying, “Look, these IT . . . our IT bills are going through the roof as we buy more of these cloud computing services. Let’s just put the brakes on for now. Let’s just focus on what we’re doing and try and cut the costs of all of that.” And so it’s suddenly leading to this big slowdown. And Amazon Web Services, being the biggest of all, is the one that’s been hit the hardest.

Marc Filippino
Richard, if there’s one common thread from all of these big tech earnings that we’ve seen, what would it be?

Richard Waters
Well, I would say two things. I would say on the revenue line, we’ve seen this softening. And the question I think everybody is asking is, are we at the bottom for the tech sector? Is it going to rebound from here and if so how strongly? And I think there’s been some optimistic noises. Apple, for instance, Tim Cook said, you know, there’s production problems are behind us in China. IPhone demand is still very strong, and we think we’re going to bounce back. And so I think there’s some optimism here. On the cost side, on the other hand, we’ve yet to see because job cutting is only just starting. There’s very much a feeling, I think, across Wall Street that this is just the beginning, that companies like Alphabet, Google’s parent in particular, are already just trimming at the edges. And maybe Microsoft is. And if things turn down, we might have to see a lot more.

Marc Filippino
Richard Waters is the FT’s west coast editor. He covers all things tech.

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Central bankers were busy this week. The Federal Reserve raised its benchmark interest rate 25 basis points. The European Central Bank followed with a 50-basis point increase yesterday, and the Bank of England also bumped up its key rate by 50 basis points. But even with all this hawkishness, stocks and bonds soared. The FT’s Katie Martin says financial markets may have a case of selective hearing. She joins me now to talk more about it. Hey, Katie.

Katie Martin
Hey, Marc. How are you doing?

Marc Filippino
So central bankers announce their rate decision, and then they make some comments about what’s to come later in the year. What did the central bankers say, and what do you make of the market reaction?

Katie Martin
So the Fed, the biggest of the bunch, it said effectively, “Look, we’ve got more to do. We have not slain this inflation monster yet. We’ve got more to do.” All things being equal, that’s hawkish; that’s bad for stocks. But actually what else the Fed chair Jay Powell said was, “But we do have disinflation here now.” You know, the inflation rate is coming down. And he was given ample opportunity to push back at what’s been happening in markets for the past few months, which is just stocks rising and rising for no readily apparent reason. He was given every opportunity to say, “You know, the markets got a bit ahead of itself here,” but he didn’t. And so the market has taken that as a sign that, “Ha! Maybe the Fed’s almost done here. Maybe, you know, all these horrible rate rises that have been blasting into our portfolio, maybe they are not over but on their way to being over.” And it was kind of, you know, it was similar in a way, with the other central banks so that the Bank of England kind of suggested after, you know, 10 rate rises in a row that maybe rates may have peaked. Last one, European Central Bank a bit more aggressive in the others. It’s done less tightening than the other big central banks so far but said it was stay the course. So the indication is that they’re going to keep on raising rates over in Frankfurt, but the market has just heard the bits that it wants to hear.

Marc Filippino
Yeah, I guess that is the confusing part for me when it comes to the market reaction, is that they’re acting as though these moves are dovish. But it’s not dovish, it’s just less hawkish. It’s like baby hawk, you know, it’s like a little baby hawk.

Katie Martin
That’s exactly what’s an investor from Neuberger Berman, an investment firm, was saying in a note which is central banks have moved from being hawkish to neutral. And the market has said neutral is shmeutral and gone straight to dovish. Like it’s fine guys, you know, these rate rises are over and, you know, inflation is on its way to being defeated. Let’s get back to the good old days, which was central banks raise rates for a while, then the economy slows down, then they cut rates for a while.

Marc Filippino
But these central banks have given no indication. In fact, Jay Powell earlier this week basically said that there’s no way they’re cutting rates this year.

Katie Martin
This is the big dilemma in markets now. You know, the big money managers that I speak to are like I do not understand why everyone is so excited. We’ve had inflation come off the boil a little bit, but (a) we don’t understand inflation as well as we thought we did; there’s every possibility this kicked higher; (b) there are new inflationary factors that are coming on board. So the reopening of China — fantastic news for a number of reasons. But think about all the commodities they’re going to be consuming over in China with the reopening. Could this be, you know, could this inject a bit more inflation into the global system? And, if you do believe that central banks are going to start cutting interest rates again towards the end of this year, which a lot of people do believe, rightly or wrongly, that, the only reason they would do that would be if there was a big recession coming. And if there’s a recession coming, why are stocks moving higher.

Marc Filippino
So Katie, markets aside, what are central bankers trying to achieve right now?

Katie Martin
So the thing to really remember here is that central bankers are people, too. You know, they do not want to be the cohort of policymakers that let inflation run riot in a way that became impossible to control for decades to come from here. They also don’t want to be the central bankers that raised interest rates so high that they tipped the world into a global recession. They don’t want to do too much. They don’t want to do too little, where a very, very delicate juncture now. Like we were saying, the market has taken the most favourable possible interpretation and run with it. Will that turn out to be right? You know, maybe. But if it’s not, then it will collide with reality fairly forcefully at some point over the next few weeks or months.

Marc Filippino
Katie Martin is the FT’s markets editor. Thanks, Katie.

Katie Martin
Pleasure.

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Marc Filippino
All that hawkish behaviour from the Fed may have dampened the hot US jobs market last month. Analysts expect the latest report out today to show that job growth slowed in January. It would mark the sixth straight month of slowed growth. The unemployment rate is expected to have inched up to 3.6 per cent. That would be just shy of its pre-pandemic low.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back next week for the latest business news.

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The FT News Briefing is produced by Sonja Hutson, Fiona Symon and me, Marc Filippino. Our editor is Jess Smith. We had help this week from David da Silva, Michael Lello and Gavin Kallmann. Our executive producer is Topher Forhecz. Cheryl Brumley is the FT’s global head of audio, and our theme song is by Metaphor Music.