Weekly view - Search wars

Last week, ‘Bard’, Google’s answer to ChatGPT, a rival artificial intelligence (AI) chatbot, gave an incorrect answer in its first video demo. The market’s verdict was harsh, with Google parent Alphabet closing 8% lower last Wednesday. Nonetheless, we believe AI could have an important impact on the tech landscape, and sooner than some expect. After all, it took 16 years for the mobile phone industry to reach 100 million users and three-and-a-half years for WhatsApp to reach this figure—but just two months for ChatGPT to arrive at the same milestone.

The US Labor Department revised figures for the December consumer price index (CPI), which it now says rose by 0.1% month on month rather than dipped by 0.1%. With CPI data for the previous two months also revised upwards, the higher figures are weighing on expectations for the January CPI report, to be announced tomorrow. Changes to the weightings given to various items mean that services will have a bigger weight than before. We will pay particular attention to ‘super core’ inflation (which comprises the price of services and excludes energy and housing) to determine the Fed’s appetite for a change in its policy stance. We still do not see Fed rate cuts this year. This week in the US will also see the release of the January retail sales report and the latest Small Business Economic Trends Survey. The recent high correlation of equities and bonds to inflation suggests that any signs that price rises remain an issue could spur volatility and be negative for risk assets generally. Increased volatility means buying portfolio protection makes sense. Meanwhile, earnings figures are coming in slightly better than feared, especially in Europe in a context where earnings numbers are leading to a sharp discrepancy in stocks’ performance. This was evident in the banking sector, for example, where forecast-beating results from a major Dutch bank sent its shares soaring, whereas earnings disappointment from a French and Swiss bank sent their share price lower. The current environment is very much one for stock pickers.

With Russia cutting oil production from next month in response to further Western sanctions, we see the risk of a geopolitics-induced recession gaining ground. This risk was further brought home by the Americans’ shooting down of Chinese ‘spy balloons’ in recent days, and President Biden’s stern warning to Beijing in his State of the Union speech. Also of note, China has been steadily increasing its gold reserves in recent months, indicating a drive to wean itself off the US dollar. We believe companies will continue to pursue friend-shoring. Elsewhere, wage growth in Japan (although so far mostly driven by bonuses) and our expectation that the nominee to the position of Bank of Japan governor, Kazue Ueda, will be more hawkish than his predecessor enables us to remain positive the yen.