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OCTOBER 27, 2023

INFLATION ROSE

According the latest report from the Commerce Department, inflation picked up in September, but consumer spending proved to be even stronger than anticipated. The core personal consumption expenditures price index, which the Federal Reserve uses as a crucial measure of inflation, rose by 0.3% for the month, in line with the Dow Jones estimate and higher than August’s 0.1% level. In addition, the report revealed that despite the increase in prices, personal spending showed robust growth, rising by 0.7% which exceeded the predicted 0.5%. Personal income also increased by 0.3%, slightly below the estimate. Furthermore, when including volatile food and energy prices, the PCE index saw a 0.4% increase, and on a year-over-year basis, core PCE increased by 3.7%, a slight decrease from August, while headline PCE remained at 3.4%, the same as the previous month. Moreover, it is worth noting that the PCE is favored by the Federal Reserve as an inflation measure due to its consideration of consumer behavior changes, such as substituting lower-priced goods as prices rise, and as the Fed looks ahead to its decision on interest rates, this report will certainly play a role in their considerations. However, as of now, markets largely brushed off the report, with stock market futures slightly higher, and Treasury yields showing mixed movements across the board.

RAPID GROWTH

The crypto options market is experiencing substantial growth as the notional open interest in bitcoin and ether options contracts on leading exchange Deribit has surged to $20.64 billion. This is almost on par with the peak recorded in November 2021 – when bitcoin hit $66,000, indicating significant market growth. Deribit, which controls 90% of the global crypto options activity, has seen a remarkable increase in outstanding contracts. This serves as a significant achievement for the exchange and indicates the broader market’s growth and increasing interest in options trading. Additionally, the recent increased options activity holds notable influence on cryptocurrency prices, as wherein investors and market makers play a greater role in determining the spot market price.As a result, bitcoin has surged by 30% in just two weeks, currently trading above $34,000.

RECORD MARGINS

Amazon CEO Andy Jassy has been committed to slashing costs and boosting profitability since taking the helm in 2021, and this approach has shown to pay off, as the company reported its highest operating margin of 7.8% in the third quarter, a significant increase from the 2% margin a year ago. Jassy’s focus on optimization and efficiency has been instrumental in achieving these results, both within Amazon and for customers of Amazon Web Services (AWS), and although AWS’s revenue growth has been slower compared to competitors like Microsoft Azure and Google Cloud, Jassy remains optimistic about its future, particularly with the rising demand for generative artificial intelligence. Additionally, Amazon has exercised caution in hiring and implemented robust cost controls, including reduction in sales and marketing expenses. Overall, following the latest earnings report from Amazon, we can say that Jassy’s strategies have transformed Amazon into a highly profitable entity.

POTENTIAL REBOUND

Major Wall Street firms have noted that a challenging year for dealmaking may have reached its lowest point. As a result, some companies are now exploring the possibility of merging, providing a glimmer of hope for a potential rebound in investment banking revenues following a disappointing third quarter. According to Dealogic data, global investment banking revenue experienced a sharp 16% decline in the third quarter compared to the previous year. However, there is growing optimism among bankers due to recent high-profile acquisitions by Exxon Mobil and Chevron, as well as a resurgence in initial public offerings (IPOs). These developments are expected to bolster investment banking revenues in the upcoming year. Moreover, despite ongoing uncertainties surrounding factors such as U.S. interest rates, inflation, and conflicts in Ukraine and the Middle East, conservative predictions suggest a modest 5% to 10% increase in investment banking revenue for major banks next year. Nevertheless, it is worth noting that activity will likely remain subdued compared to the remarkable performance seen in 2021.

INTERNATIONAL NEWS

Consumer inflation in Tokyo, a leading indicator for Japan, accelerated unexpectedly in October, indicating a broader rise in prices that could lead to the end of ultra-low interest rates. The Tokyo core consumer price index, which excludes volatile food prices but includes fuel costs, rose 2.7% from a year earlier, surpassing the predicted 2.5% gain. This data is likely to prompt the Bank of Japan to revise its inflation forecasts during its upcoming policy meeting as the rise in prices challenges the central bank’s belief that inflation will decrease in the coming months as cost pressures subside. Moreover, the increase in services prices suggests that inflationary pressure may extend beyond goods due to the potential for higher wages. The Bank of Japan, known for its dovish stance, has committed to maintaining ultra-low interest rates until price increases driven by domestic demand become more sustainable, however, with global interest rates surging, there is mounting pressure on the Bank of Japan to make adjustments to its bond yield control, including the possibility of raising existing yield caps.

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