Weekly Digest: Eurozone Inflation Ticks Up, AI Profit Boom


4 minutes read

May 19, 2023

20 and 50 euro banknotes with the EU flag in the background

20/05/2023: Eurozone inflation accelerates fueled by rising services and energy costs, Goldman strategists see a potential surge in profits driven by AI, gold price slides. And more.

💡Quote of the week

“The European Central Bank’s task in bringing inflation back under control almost makes the Federal Reserve’s job look easy.” - Bloomberg Opinion

Investment news

2 euro coin and euro inflation coin on top of the EU flag

🇪🇺 📈 Stubborn inflation. Eurozone inflation accelerated to 7% in April from 6.9% a month earlier as rising services and energy costs offset a slower rise in food prices. (Reuters)

The ECB has raised interest rates by combined 375 basis points since last July to stop runaway inflation, which has been above its 2% target for nearly two years.

Gold slides. Gold prices declined on Thursday due to strong economic indicators from the United States, which reduced expectations of the Federal Reserve lowering interest rates. The positive outlook regarding a resolution for the debt ceiling issue also contributed to the downward pressure on gold.

Spot gold went down 1.4% to $1,954.81 per ounce, after earlier hitting its lowest since April 3 at $1,951.73. U.S. gold futures were 1.4% lower at $1,957.50.

🇨🇭 🏦 The stakes are high. UBS has identified potential costs and benefits in the range of tens of billions of dollars resulting from its takeover of Credit Suisse. (Reuters)

During a regulatory presentation, UBS estimated a negative impact of $13 billion from fair value adjustments of the combined group's financial assets and liabilities, as well as $4 billion in potential litigation and regulatory costs. In addition, a change in accounting standards could bring the total hit to $28.3 billion.

However, that would be offset by $17.1 billion from a write-down of Credit Suisse's AT1 bonds and other factors.

JPMorgan building at night

🤞 Markets are right to bet on U.S. rate cuts. It’s highly likely that the U.S. will experience a recession, and as economic growth slows down, the Fed may reduce interest rates by the third quarter, according to JPMorgan Asset Management. (Bloomberg)

“The market is right to be penciling in cuts. Inflation is too high and it will take a recession to bring it back down,” Seamus Mac Gorain, head of global rates in London, said, adding that U.S. banking woes “have only made a recession more likely.”

🤖 Potential AI profit boom. Goldman Sachs strategists believe that artificial intelligence holds significant potential for supporting long-term US profit margins. However, they acknowledge that predicting the impact of AI is challenging due to numerous unknown factors associated with it. (Bloomberg)

According to the strategists at Goldman Sachs, led by Ben Snider, AI has the potential to increase net margins by approximately 400 basis points over a ten-year period. They highlight that this stands in contrast to various challenges in the near term, such as a potential recession, interest rates, high inventory levels, and inflation, which make significant margin expansion unlikely.

🇨🇳 Slow recovery. China's economic data for April came in below expectations as the economy continues to struggle from the impact of Covid restrictions. (CNBC)

The country's industrial production increased by 5.6% year-on-year in April, compared with a Reuters poll's prediction of 10.9%. Retail sales rose 18.4%, lower than economists' predictions of 21%.

🇯🇵 Foreign investors are back. The Tokyo Price Index, also known as Topix, on Tuesday hit its highest point since August 1990, outperforming its regional peers in the Asia-Pacific. (CNBC)

Topix rose 0.6% on Tuesday, led by utilities, consumer cyclicals, technology, and financials. Tokyo Electron, Oriental Land, Softbank Group, Sony, and Nintendo were among the top gainers on Wednesday.

🫅 The reason you exist. Elon Musk claimed he is “the reason that OpenAI exists,” citing his past investment in the project, and that Microsoft exerts significant control over the AI company, a statement strongly rejected by Microsoft CEO Satya Nadella. (CNBC)

“I came up with the name,” Musk said, adding he was instrumental in hiring key scientists and engineers at the company.

📸 Image of the week

A meme showing how a poll about inflation experiences inflation


The European Central Bank building

🤔 Curbing Europe’s inflation. This is the problem ECB President Christine Lagarde and her officials “can’t solve by themselves.” (Bloomberg Opinion)

“The EU has long recognized the fundamental challenge to its long-tern economic stability — the mismatch between a single currency, on one hand, and uncoordinated fiscal and financial policies on the other. The ECB’s painful policy dilemma should refocus attention on this threat,” Bloomberg editors write.

What else is happening

Dark clouds looking over the Capitol building in Washington D.C., USA

🇺🇸 Debt ceiling crisis. President Joe Biden and top Republican Kevin McCarthy got closer Tuesday to a deal averting a U.S. debt default. (Reuters)

After an hour of talks, McCarthy said the two sides remained far apart on an agreement to lift the debt ceiling. But he added, "It is possible to get a deal by the end of the week. It's not that difficult to get to an agreement."

🇹🇷 Presidential runoff. Turkey will hold a runoff election on May 28, with incumbent President Recep Tayyip Erdogan in the lead. (Anadolu)

With more than 99% of votes counted, Erdogan is leading with 49.54% of the vote while his rival Kemal Kilicdaroglu has 44.88%, according to Turkey’s Supreme Election Council.

And finally…

Little polar bear cub in the snow

🌍 Global warming. For the first time ever, global temperatures are now more likely than not to exceed 1.5 degrees Celsius of warming within the next five years, the World Meteorological Organization says. (Reuters)

With a 66% chance of temporarily hitting 1.5C by 2027, "it's the first time in history that it's more likely than not that we will exceed 1.5C," said Adam Scaife, head of long-range prediction at Britain's Met Office Hadley Centre.


See you next week!


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