The strong dollar is affecting Microsoft, who is next?

Stocks catapulted higher yesterday on news that OPEC was going to raise production to fill the gap caused by Russian sanctions. More supply should help ease energy inflation, a top suspect in the current wave of inflation.

With great strength comes great weakness. If you listen carefully to the Fed-talk you can sense it. It is subtle, but it’s there. Some Fed members are already openly pondering when it may become appropriate to pause rates hike. Wow! On the one hand there seems to be unanimous support for two +50 basis point hikes this month and next, but after that it gets a bit fuzzy. Why? Are the Fed Heads seeing something we are not, or are we just simply missing the signals? The Fed would only pause its hiking bonanza if inflation moderates or if the economy appears to be heading for the rocks. Inflation has moderated a bit, but it is still far too early to know if the moderation will persist or if the slowdown will be meaningful enough to warrant a change in course. So, it seems that, perhaps the central bankers are seeing signs that the economy is facing some headwinds. Private banker Jamie Dimon, JPMorgan Chase CEO, certainly thinks so, and intimated that he is expecting an economic “hurricane”. His fellow top bankers may not be quite as negative, but they are certainly not sanguine either. Recent economic numbers are beginning to show some cracks. The global economy is now well in the wake of massive government stimulus which certainly contributed to the post-COVID economic recovery but also played a big role in creating the current, oppressive inflationary environment. Less free money to spend will certainly impact consumption, 2/3 of the US GDP. The Fed, along with other central banks are determined to tamp down inflation through interest rate hikes and there are some early signs that the policy is already having an effect on demand, however, those early signs are still not enough to stop the Fed from tightening by at least another +100 basis points. All of this tightening and talk of further tightening has affected the economy in other ways which gets very little coverage but is noteworthy. Since the Fed first announced its hawkish intentions the US dollar has been on the climb. Currencies increase in value relative to other currencies when the economy is strong or when domestic rates are on the rise. In this case, not only is the US Economy stronger than most of its trading partners, but it has also taken a relatively stronger rate hiking stance. The Dollar Index measures the US Dollar against a basket of its trading partners’ currencies, and it is currently at its highest level in almost 2 decades. What does that mean? Well, it is good if you want to purchase goods produced outside the US, as a strong dollar makes imports cheaper. However, for US companies that sell products outside the US, a strong dollar has a negative effect. US-produced goods are more expensive to foreign buyers. What’s more, companies repatriating foreign earnings into the US dollar are also negatively impacted. You don’t believe me? Just ask Microsoft, which just yesterday lowered its forward guidance for the current quarter. The lowered guidance was not due to lack of demand or spending, but rather unfavorable currency conditions caused by the stronger US Dollar. Microsoft’s warning may be the first sign of another economic drag as most software companies derive considerable revenues from foreign buyers. The Fed has its work cut out for it, indeed. It must get things just right to avoid Dimon’s hurricane. No wonder Fed members are already abandoning their hawkish resolve, if but just a bit. Success will surely require a subtle hand.

WHAT’S SHAKIN’

Tesla Inc (TSLA) shares are lower by -4.32% in the premarket after a report detailed an Elon Musk memo announcing 10% job cuts and that he had a “super bad feeling” about the economy. Potential average analyst target upside: +21.4%.

Micron Technology Inc (MU) shares are lower by -3.81% in the premarket after Piper Sandler downgraded the stock to UNDERWEIGHT from NEUTRAL. Piper cited weaknesses in consumer technology, Micron’s core business, for the downgrade. Dividend yield: 0.53. Potential average analyst target upside: +45.1%.

YESTERDAY’S MARKETS

Stocks initially swooned, but ultimately rocketed higher in response to the prospect that OPEC may increase output which may ultimately cause energy costs to come down. The S&P500 rose by +1.84%, the Dow Jones Industrial Average climbed by +1.33%, the Nasdaq Composite Index jumped by +2.69%, and the Russell 2000 Index gained +2.31%. Bonds advanced and 10-year Treasury Note yields were flat at 2.90%. Cryptos gained +0.34% and Bitcoin slipped by -1.23%.

NXT UP

• Nonfarm Payrolls (May) is expected to come in with a +320k gain after a +428k rise in April.
• Unemployment Rate (May) may have fallen to 3.5% from 3.6%.
• Next week we will get Consumer Price Index and University of Michigan Sentiment, amongst other things. Please check back in on Monday for calendars and details.