ON DECK FOR THURSDAY, FEBRUARY 5TH
KEY POINTS:
- Gilts rally, sterling slides on dovish BoE guidance
- ECB, Banxico to hold
- US job cuts soared in January while hiring activity vapourized
- US job openings may increase in today’s JOLTS reading; claims also on tap
- German factories are crushing it
- BoC's Macklem to speak
- Mag7 Cap-ex — Boon or Bane to the US economy?
More tech earnings, BoC’s Macklem, US job market readings, and three central bank decisions lie ahead. Alphabet’s earnings beat, but heavy cap-ex is increasingly being questioned by markets in relation to return expectations.
MAG7 CAP-EX — BOON OR BANE?
Enter chart 1 that shows what five of the Mag7 are spending on cap-ex up to the end of 2025 since we don’t have Amazon and Nvidia yet. If we added the latter two up to Q3 of last year, then the Mag7 would be spending almost US$360B/year on cap-ex and adding Amazon’s and Nvidia’s Q4 tally is sure to push this significantly higher.
The numbers are poised to get a lot bigger this year; Alphabet’s US$91billion last year is guided to rise to as much as US$185 billion in 2026. Think about this. Doubling their cap-ex budget means that one single company could spend more on cap-ex this year than the GDP of six out of 10 Canadian provinces while equalling well over half of the GDP of each of the third and fourth largest provinces of BC and Alberta. By comparison to US states, Alphabet’s targeted AI cap-ex budget this year could exceed the annual GDP of 40% of US states.
Pending Amazon’s and Nvidia’s numbers, consensus estimates point to 2026 cap-ex guidance from the Mag7 totalling about US$540 billion from about $400B or more last year.
If this year’s total cap-ex exceeds half-a-trillion USD which is likely to be sharply exceeded, then the Mag7’s cap-ex could exceed the GDP of all but the top dozen or so US states and the annual GDP of every single Canadian province except for Ontario.
We’d all better hope that the tech bros find a way to make an awful lot of money with an awful lot of multiplier effects across the economy out of an awful lot of cap-ex . This could be a boon to the US economy if it persists and ripples throughout.
It could also become a bane to the US economy should it soften as it’s the only game in town holding up US investment activity that is otherwise trending lower. The only game in town that is driving semiconductor and DRAM prices through the roof (chart 2). Electricity prices too (chart 3). And they say AI is disinflationary.... Perhaps ultimately, although views on this becoming the case are largely speculative and highly uncertain. In the meantime, we’re left with the immediate consequences of driving key prices higher and with coming spillover effects into the broader economy.
Your turn, Amazon, that releases Q4 earnings and guidance including on cap-ex in today’s after-market (Q4 EPS US$1.96).
German Factories are Crushing It
Overnight data was light. German factory orders utterly crushed consensus by posting a 7.8% m/m SA gain in December (-2.2% consensus), adding to the prior 5.7% jump in November. Let's see tomorrow's factory output and exports. Chart 4 shows the stunning ascent of German cap-ex orders which I suspect is at least partly tied to the US AI-driven cap-ex boom.
French factories are not doing as well. Output fell by -0.7% m/m SA in December (consensus +0.2%) after a roughly flat prior reading.
BoE Guidance Drives Strong Easing Bets
A trio of central bank holds is expected to hold. The Bank of England already announced it held Bank Rate at 3.75% which surprised…..absolutely no one! What did surprise markets was dovish inflation guidance with the comment that inflation persistence is “less pronounced” and that the policy rate is “likely to be reduced further.” As a result, gilts are rallying across the front-end and outperforming all other global benchmarks this morning while sterling is underperforming all major crosses. Markets now lean a little closer to another 50bps of cuts this year.
ECB and Banxico to Hold
Also on tap are decisions from the ECB (8:15amET statement, presser 8:45amET) and Banxico (2pmET) today. Previews are in my weekly.
US Layoffs Soared in January
Challenger job layoffs soared to 108.4k in January which is much more than the lumpy announcements from UPS (30k), Amazon (16k) and Dow (4.5k). This is the highest total for monthly layoffs since October’s surge that was driven by DOGE cuts and tech. Charts 5 & 6 compare months of January (since it’s not seasonally adjusted) across the years for both cuts and hiring. Cuts are not the highest for a January but higher than average, but hiring activity vapourized last month compared to like months of January in history.
US JOLTS job openings (10amET) were delayed by the mini shutdown but I’m tracking a rise for today's figure.
BoC’s Macklem to Speak
BoC Governor Macklem talks about “Structural Change — Canada at a crossroads.” The speech will be released at 12:25pmET at which point headlines will scroll. There will be a moderated Q&A and then a 2pmET press conference. This is Macklem-goes-Roady to pitch last week’s narrative in customary fashion so I don’t expect much of anything new. Since their communications a week ago we’ve only taken down monthly GDP and Warsh’s appointment and light other global data and developments. Recall he said that they can neither judge whether the next move will be down or up as one example of the long pause.
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