Google shares tumble on botched AI demo, more hawkish Fed speeches, ASX to fall

MARKETS

• Nasdaq led the declines with Alphabet down almost -8% after its AI chatbot Bard provided an inaccurate response in public demo
• Market is experiencing a clash of themes as disinflation and soft landing narratives takes on hawkish Fed speeches, underwhelming earnings

STOCKS

TripAdvisor (+3.8%) upgraded by BoFA from Underperform to Buy due to accelerating growth across the business and strong US demand

Tesla (+2.3%) will reveal third part of EV master plan at its first investor day on 1 March (Reuters)

Alphabet (-7.7%) slumps after its Bard chatbot demonstration gave the wrong answer (CNBC)

• Search engine wars: "From now on, the [gross margin] of search is going to drop forever ...There is such margin in search, which for us is incremental. For Google it’s not, they have to defend it all.” - Microsoft CEO Satya Nadella

EARNINGS

New York Times Company (+12.0%): Earnings topped analyst expectations; CEO said the company gained more than 1 million digital-only subscribers in 2022.

Uber (+5.5%): Revenue beat, EBITDA smashed expectations; enters 2023 with a profitable business model; shares rally to a 10-month high.

Chipotle Mexican Grill (-5.0%): Revenue, EPS and comparable sales missed; flagged a pullback in customer spend in the December quarter.

• "We delivered strong growth in 2022, expanding average unit volumes and restaurant level margin, while opening the highest number of new restaurants in six years, despite facing a challenging and fluid macro environment.” - CEO Brian Niccol

Under Armour (-8.3%): Revenue and earnings beat; flagged a 50% year-on-year increase in inventory; raised FY profit outlook

ECONOMY

• Maersk sees global trade contracting by 2.5% in 2023 Bloomberg)
• Unexpected jump in used vehicle prices in January adds uncertainty inflation and Fed rates outlook (Bloomberg)
• API reports fall in oil inventories after jump in prior week (TheStar)
• Chinese oil demand makes comeback on reopening, with exports, holiday travel and domestic consumption higher (Bloomberg)
• Fed Chair Powell provides little pushback to easing conditions, economists see hawkish takeaways (Bloomberg)
• BOC Governor Macklem says no more rate hikes if inflation meets central bank's expectations (Reuters)
• ECB's Schnabel says limited impact of tighter policy on inflation (Bloomberg)

Deeper Dive

Fed Rundown: More hawkish speakers

New York Fed President John Williams:

• “Maybe services prices stay elevated, and if that happens we'll need higher rates."
• Rates were "barely into restrictive territory"
• Wage growth remains "well above" levels that are consistent with the Fed's 2% goal and services sector price pressures remain persistent
• Backed the views of a peak rate of 5.0% to 5.25%, higher than what markets expect

Fed Governor Chris Waller:

• "We are seeing that effort [to reduce inflation] begin to pay off, but we have farther to go. And, it might be a long fight, with interest rates higher for longer than some are currently expecting."
• Excessive inflation is a more serious problem than higher rates

Taking Technicals: S&P 500

A different layout today (as opposed to candlesticks and moving averages).

The S&P 500 line chart shows three 'false breakouts' since late 2021. We're in the midst of another breakout that's trying to hold above the key level. Can it hold or is it just another rinse and repeat?

Sectors to watch

Nothing too exciting overnight. It was a risk-off session where the blue-chip Dow outperformed the Nasdaq (on a relative basis).

Looking at our overnight ETF list, most were down 1-2%, most notably: Fintech (-2.8%), Biotech (-2.2%), Cloud (-1.5%), Uranium (-1.4%) and Copper (-1.2%).

Gold and oil inched higher overnight, both up for a third straight session after experiencing a sharp selloff last week.

Quick bites

Quick Bites and the Broker Watch was written by Hans Lee.

The trouble with housing: Interest rates were increased at a ninth straight meeting earlier this week. For a million-dollar loan, the increase since May 2022 in repayments is now $1,816. And with the RBA arguing more interest rate increase(s) are needed, it sounds like they are getting hawkish right at a time when many other central banks are pondering or discussing the opportunity for a step-down. But the reality is - they’re going to have to keep going especially when charts like this keep trending in the wrong direction.

The above chart just basically says it now takes 11 years (nationally) to save for a 20% deposit. 11. Whole. Years. And that’s before we talk about paying off the loan.

Broker watch

So given all the above, why in the world would Citi then upgrade REA Group (ASX: REA) and Domain (ASX: DHG) to buy ratings now? I’ll let analyst Siraj Ahmed explain.

"While we see near-term conditions as tough and are below consensus for FY23e, we upgrade both REA and Domain to Buy as we see the risk-reward as more compelling from a 12-month perspective especially post recent cost reduction by both companies. Further, Citi’s quantitative analysis indicates that housing exposed stocks bottom approximately 6 months before house prices (assuming those bottom out at the end of 2023)."

Of course, the question then shifts to the housing recovery. Citi’s analysis suggests a 6% pop nationally in 2024. But can the two major players take advantage of the increase by passing on price increases for listings?

Yes, says Ahmed, especially if REA pushes through with a plan for subscription-centric listings.