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Fed decision ahead; Microsoft, Alphabet’s AI costs – what’s moving markets

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Investing.com — U.S. stock futures are mixed as investors await a major Federal Reserve interest rate decision and potential commentary on future borrowing costs from the central bank. Microsoft (NASDAQ:MSFT) and Google-owner Alphabet (NASDAQ:GOOGL) warn that spending on developing their artificial intelligence capabilities will be higher this year, offsetting a strong set of quarterly earnings from the tech giants. Elsewhere, Elon Musk’s massive Tesla (NASDAQ:TSLA) pay package worth nearly $56 billion is voided by a Delaware judge.

1. Fed decision ahead

The Federal Reserve is widely tipped to keep interest rates steady following the central bank’s latest two-day policy meeting on Wednesday, meaning any comments from officials around the path ahead for interest rates will be in sharp focus.

Borrowing costs currently stand at a range of 5.25% to 5.50%, the highest in more than two decades, after the Fed embarked on an aggressive campaign of rate hikes aimed at cooling elevated U.S. inflation.

Recent data has suggested that this tightening cycle may be having the desired effect. While price growth remains above the Fed’s stated 2% target, it has continued to show signs of easing back down to this mark. Economic activity has also been resilient, a trend most recently evidenced by a stronger-than-projected advance reading of fourth-quarter U.S. gross domestic product last week.

The figures have bolstered hopes that the Fed may be able to defeat inflation without sparking a broader economic meltdown — a scenario known as a “soft landing.”

Policymakers signaled in December that there could be as many as six rate reductions in 2024, fueling anticipation late last year that a twenty five basis point cut could come as early as March. Yet several Fed officials, wary of reigniting upward pressure on inflation, have since poured cold water on these expectations. Commentary today from the Fed — and Chair Jerome Powell in particular — could thus impact how markets see rates evolving in the coming months.

2. Futures mixed

U.S. stock futures were trading on both sides of the flatline, as investors looked ahead to the Fed decision and gauged a fresh slate of major corporate earnings.

By 05:26 ET (10:26 GMT), the Dow futures contract had added 34 points or 0.1%, while S&P 500 futures had dipped by 27 points or 0.5% and Nasdaq 100 futures had shed 224 points or 1.3%.

The Fed could finally “put a pin in the idea” of an imminent rate cut on Wednesday, said Michael Hewson, Chief Market Analysts at CMC Markets (LON:CMCX), in a note. “It would be surprising if the Fed were to signal a cut in rates in March although they might well open the door to one on [the second quarter],” Hewson added.

Elsewhere, shares in Microsoft and Alphabet slipped in premarket trading, with Wall Street fretting over the large costs both of the tech behemoths are set to incur in their push to develop products powered by artificial intelligence (more below). More earnings are due out today, including numbers from embattled planemaker Boeing (NYSE:BA) and drugmaker Novo Nordisk (NYSE:NVO).

In the prior session, the benchmark S&P 500 closed lower by 0.1%, but was still just under its all-time high reached on Monday, while a dip in megacap names like Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) dragged down the tech-heavy Nasdaq Composite by 0.8%. The 30-stock Dow Jones Industrial Average gained 0.4%.

3. Microsoft, Alphabet flag AI costs

Microsoft and Google-parent Alphabet have flagged that they expect capital spending will rise this year as they attempt to bolster their position in the intensifying race to harness surging demand for generative AI.

Redmond, Washington-based Microsoft told analysts in a post-earnings call that the need to scale its AI infrastructure would cause expenditures to “increase materially” on a sequential basis in areas like data centers and servers. Chief Financial Officer Amy Hood added that Microsoft, who surpassed Apple has the world’s biggest company earlier this month, is shifting to an “AI-first position.”

Alphabet also said that spending would be “notably larger” in 2024, with the YouTube-parent driving to build out its AI offerings at its key advertising and cloud services units. In particular, Alphabet is targeting the launch of an advanced upgrade to its generative AI chatbot, Bard, later this year.

Finance chief Ruth Porat noted that the group sees “extraordinary” potential for the applications of AI for users, adding that the technology offers “long-term growth opportunities.”

Both firms posted better-than-anticipated profit and revenues in their most recent quarters, although Wall Street’s tepid reaction indicated that doubts remain over whether they can maintain the soaring spending levels needed to deliver generative AI.

“In the larger picture, the trend for this earnings season is clear: the market wants to see who has enough spending power to dominate the innovation war expected to play out as soon as monetary conditions improve,” said Thomas Monteiro, Senior Analyst at Investing.com. “In this case, more than actual [earnings per share], investors want to see improving margins and free cash flows so they can understand that the company will have a shot in the AI arms race.”

4. Judge tosses out Musk’s massive Tesla pay package

A judge in the U.S. state of Delaware has voided tech tycoon’s Elon Musk’s huge $55.8 billion Tesla pay package, saying that it amounted to an “unfathomable sum” that was not fair to shareholders.

The decision, which tosses out the biggest remuneration offering in corporate America, argued that the directors of the electric vehicle giant appeared to be beholden to Musk’s “superstar appeal.” The case related to a lawsuit brought by some Tesla stakeholders who believed that the compensation was excessive.

Should the ruling be upheld, Musk would lose options to more than 303 million Tesla shares, or roughly about 10% of the company and well below his previously stated goal of 25% ownership.

Shares in Tesla slipped in premarket trading on Wednesday.

5. Crude dips after weak Chinese manufacturing data

Oil prices edged lower, as disappointing manufacturing activity data from China, the world’s biggest crude importer, dented sentiment.

By 05:27 ET, the U.S. crude futures traded 1.2% lower at $76.89 per barrel, while the Brent contract dropped 1.1% to $81.59 a barrel.

Official data showed that manufacturing activity in China contracted for a fourth straight month in January, raising further doubts around the strength of the economic recovery of this vital crude market.

That said, the crude benchmarks are still on course for their first monthly gain since September as broadening Middle East conflicts exacerbated supply concerns over this oil-rich region.

Meanwhile, U.S. inventory data from the American Petroleum Institute indicated that crude stockpiles dropped by 2.5 million barrels in the week ended Jan. 26.

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