Higher For Longer

Here are some of the biggest stories from last week:

• The Fed kept its interest rates unchanged but said that they’ll stay elevated for longer.
• Europe’s economy emerged from recession last quarter.
• But the bloc’s recent retreat in inflation stalled in April.
• Amazon’s earnings topped expectations, fueled by strong sales at its cloud unit.
• Apple’s revenue fell by less than feared last quarter.
• Copper miners need to spend billions to address the metal’s future supply deficit.

Dig deeper into these stories in this week’s review.

Macro

The eurozone emerged from recession last quarter, after its four biggest economies all grew by more than expected. The bloc’s GDP expanded by 0.3% in the first quarter from the previous three months – the strongest pace in one and a half years and topping forecasts of 0.1%. It also marked a rebound from the previous two quarters, each of which saw a 0.1% decline in GDP. Helping the revival was Germany, the eurozone’s biggest economy, which grew by 0.2% last quarter – a stark turnaround from the 0.5% contraction experienced in the previous quarter. Looking ahead, the European Central Bank sees a recovery in the bloc’s economy over the course of the year as inflation subsides, household incomes rebound, and foreign demand strengthens. The bank is predicting growth of 0.6% in 2024 and 1.5% in 2025.

Meanwhile, a separate data release showed consumer prices in the eurozone rose by 2.4% in April from a year ago, matching March’s pace and in line with economist estimates. The stalling came after a 17-month period in which inflation had fallen almost continuously. But at least core inflation, which strips out volatile food and energy items to give a better idea of underlying price pressures, continued to fall, hitting 2.7% in April from 2.9% the month before. That could be a reassuring sign for investors hoping that the ECB will start cutting interest rates in June.

Across the pond, all eyes were on this week's Fed meeting as traders sought clues about the future direction of interest rates in the world's biggest economy. Officials voted unanimously to leave the benchmark federal funds rate unchanged at a 23-year high of 5.25% to 5.5%. But they did signal that rates will likely remain elevated for longer than previously anticipated, following a slew of data that pointed to lingering price pressures in the US. However, much to the relief of investors, the Fed also indicated that it’s not currently considering any new rate hikes to counter the recent uptick in inflation, saying that it doesn’t see persuasive evidence that policy is not tight enough to bring inflation back down toward its target.

Officials also outlined plans to slow the pace at which the central bank shrinks its balance sheet. The Fed said that from June it would reduce the cap on the amount of US Treasury bonds it allows to mature each month, without buying them back, from $60 billion to $25 billion. The cap for mortgage-backed securities remained unchanged at $35 billion, though the Fed will reinvest any principal payments above the cap into Treasuries instead.

Stocks

Two more of the “Magnificent Seven” stocks reported their latest results this week. Amazon's revenue and profit for the first quarter both exceeded expectations, registering year-over-year growth of 13% and 229% respectively. The beat was mainly driven by the firm’s cloud computing division, which posted its strongest sales growth in a year on the back of strong demand for AI services. However, despite the strong performance, the company’s revenue forecast for the current quarter fell short of estimates, reflecting concerns about its main ecommerce business as consumers continue to cut back on spending. But investors were quick to look past that, focusing instead on the cloud division’s strong growth and expanding profit margins, which rose to 38% last quarter from 30% the one before.

Apple, meanwhile, saw its revenue fall 4% last quarter from a year ago, which was slightly better than analysts had feared. But it still meant that the firm’s sales declined in five of the past six quarters, hurt by a sluggish smartphone market and headwinds in China. However, despite some worries about its core smartphone business, Apple forecast big product launches that could offset the turbulent start to the year: it’s projecting low single-digit growth for its hardware business, with continued strong growth in services. In fact, services revenue increased by 14% last quarter to a record $23.9 billion. And speaking of records, Apple announced the biggest share buyback plan in US history, worth $110 billion. Investors loved the sound of that, sending the firm’s shares higher after the update.

Commodities

Demand for copper – used in renewable energy plants, power cables, EVs, data centers, and a lot more – is booming, driven by megatrends like decarbonization and AI. And while the market for the red metal is relatively well supplied at the moment, there’s a growing crowd of analysts warning of major deficits in the future.

That’s mainly because production from existing mines is set to fall sharply in the coming years, and firms aren’t investing enough to offset the drop off – let alone grow supply. Miners are arguably more interested in buying out rivals with copper exposure than building out their own production, as evidenced by BHP’s proposed takeover of Anglo American. That’s not good considering that miners need to spend more than $150 billion between 2025 and 2032 to address copper's projected supply deficit, according to consultancy CRU Group.

The reasons for copper’s underinvestment aren’t new, but they’re all getting worse: high-quality deposits are getting harder to find, mining costs are surging, small explorers are struggling to get funding, and social and environmental resistance to mining is growing. Further complicating matters is the fact that copper is a classic bellwether of the global economy, with demand rising and falling in tandem with industrial production. That makes miners very cautious about ramping up capacity for fear of getting caught out by a big drop in demand just as their projects are completed.

Finally, new copper mines take years if not decades to develop, so decisions made today must be based on projections of whether future copper prices will justify the investment. BlackRock reckons that the metal’s price needs to reach a record $12,000 a ton – or about 20% higher than today’s levels – to incentivize large-scale investments in new mines. Absent a big increase in supply, copper prices could surge much higher and risk damaging the economics of EVs and renewables, slowing their adoption.

Next week

• Monday: China PMIs (April), eurozone economic sentiment (May). Earnings: Palantir, Lucid Group.
• Tuesday: Eurozone retail sales (March). Earnings: Disney, Rivian, Arista Networks.
• Wednesday: China loan growth (April). Earnings: Shopify, ARM Holdings, Uber, Airbnb.
• Thursday: China trade balance (April), BoE interest rate announcement, minutes of the ECB’s latest meeting.
• Friday: UK GDP (Q1), Japan household spending (March), US consumer sentiment (May).
• Saturday: Chinese inflation (April).