The headline GDP figure for Q1 came in below expectations but the underlying numbers were strong once again. More significantly, the core PCE price index rebounded by an annualised 3.73% q/q in Q1, well above expectations. Core services (ex-energy & housing) prices climbed 5.08% q/q annualised in Q1, the most in a year. The 2-year treasury yield now sits at 5.00%, as the market prices out all rate cuts this year. This is pulling up the long end of the curve. The 30-year Treasury yield rose to 4.82% yesterday.
Microsoft’s capital expenditures jumped 79% y/y to $14bn in the latest quarter, surpassing estimates of $13.1bn. Capital expenditures are expected to increase “materially”, according to chief financial officer Amy Hood. Alphabet’s capital expenditures also climbed to $12bn and will at least maintain that amount per quarter for the rest of the year. This would raise capex to at least $48bn this year, up from $32.3bn in 2023, driven overwhelmingly by investment in servers and data centres. Earlier in the week, Meta raised its forecast for 2024 capex to the range of $35bn-$40bn, up from its February prediction of $30bn-$37bn.
It is difficult to envisage a material slowdown in the US economy, given the strength of technology capex and consumer spending on services. Investment will continue to be supported by the IRA and CHIPS acts, and successive US aid packages that are also boosting domestic manufacturing. The strength of the US will at the same time force Europe, and other economies, to take a bolder approach, as highlighted in Macron’s speech on Thursday, and Mario Draghi’s recent piece titled: Radical Change—Is What Is Needed.
