Markets have been behaving a little unusually over the last quarter. A way to illustrate that is to point to the behaviour in the Nasdaq, which rallied 20% in just three months. This is extraordinary and happens rarely. In fact, it was the biggest growth spurt since the 2020 recovery, and it would take more than a decade before that to see a similar pattern.
Traders can point to the AI boom (or bubble) as a superficial explanation. But that doesn’t answer the important question for forex traders: The dollar has also gained substantially in the same period. Traditionally, the currency and stock markets move in opposite directions. This has to do with the normal fluctuations in risk appetite and bond yields. If the market is risk-on, people move into stocks; if it’s risk-off, they prefer money markets. So, this concurrent rise in the most risky stock market and the dollar is notable.
Chinks in the AI Boom Armour
While AI continues to garner investor interest, there are already some cracks in the narrative. This could be a warning sign for the dollar and currencies that rely on trade with the US or risk appetite. One issue is that gains in the stock market have been driven by the expected buildout of AI infrastructure.
The biggest builders, the “hyperscalers”, have been borrowing extraordinary amounts of money to fund this build-out. Their stock prices have underperformed the market, indicating that investors are growing increasingly nervous about the engine driving the AI boom. The question is whether that will lead to a localised correction in tech stocks only or precipitate a general move lower across markets.
Rising Data Lifts All Boats
Spending a lot of money in hopes of getting a return on your investment is a normal business practice, but the issue with AI is the scale. If the economy, particularly the US economy, which has the largest presence of advanced tech, continues to grow and accelerate, there will be plenty of funding. Big tech companies could continue to increase sales and justify the expenditure.
Recent optimism has been based on solid US data, from a full-on recovery in the jobs market to a growing economy. Resolving the situation in the Middle East would lower energy prices, allowing margin decompression and giving the Fed room to tackle inflation without excessively hurting the economy. This is one of the main explanations given by analysts for the jump higher in stocks and the solid growth in the dollar over the last couple of months.
Was the Data Real?
A major flaw in this narrative was revealed on Thursday with the Non-Farm data publication. The number of jobs created was near the bottom of the expected range, but the prior two months were revised lower, for a combined 74K. The unemployment rate dropped, but only because 720K people left the workforce. This was in the same week that the Atlanta Fed slashed its Nowcast for Q2 GDP to just 1.2% annualised growth, down from over 3.0%.
The US economy likely slowed notably in the second quarter, though this was not adequately reflected in the data. If that trend continues into the second quarter, it could significantly increase the odds of a market correction. The Fed is still expected to raise rates by the end of the year, which would also reduce economic growth prospects. So far, the dollar has remained resilient, but more signs of US economic underperformance could substantially weaken the dollar this month.
