Said Waller, my god “what’s the rush?”
‘Cause things are OK at first blush
The ‘conomy’s roaring
The stock market’s soaring
And so, dreams of cuts, I must crush

But really, does anyone care
What Powell or Waller declare?
NVIDIA rallied
And gains have been tallied
So, rate cuts don’t have savoir faire

I am old enough to remember when the inherent strength of the US economy was based on its diversity of industry and geography as well as its bounty of abundant natural resources.  The governmental framework of property rights and the rule of law were critical aspects of what made this nation stand out.  But that is sooooo last week.  Instead, let me recount a famous scene from the movie, The Graduate, but updated for today:

Mr McGuire: I just want to say one word to you.  Just one word.
Benjamin: Yes, sir.
Mr McGuire: Are you listening?
Benjamin: Yes, I am.
Mr McGuire: Plastics NVIDIA

At this point, I might refute the idea of the Magnificent 7 stocks, first because Tesla hasn’t been following the script all year, but second because the reality is there is only one true god stock, NVIDIA.  It appears that the entire nation’s economy is reliant on that single company continuing to outperform analyst expectations and grow at 100% annually.  As long as it continues, the US will maintain its status as the world’s most important economy.  Seems pretty simple.  In fact, it is not clear to me why anyone would own any other stock than NVIDIA at this point, perhaps with a small percentage of assets in Bitcoin.  Only then will an investor be ready for the future!

Of course, this is not what I believe, nor would I ever suggest that someone consider this approach.  But, boy, if there is another piece of news that is remotely as important, I am still searching for it.  Every market seems to take its cues from the stock and government policies seem to be designed to either support its growth or inhibit its products from getting into the wrong hands.  Perhaps it is time to rename our nation to The United States of NVIDIA and be done with it.

Alas for this poet, equity markets are not my primary focus so I will try to look through the other scraps of information and see if there is anything interesting.  Top of the list were the assorted commentaries by four different Fed speakers yesterday, all of whom said essentially the same thing, while they expect rate cuts at some point this year, it is still too early as they are not yet confident that inflation will sustainably return to their 2% target.  That was the message from Wednesday’s FOMC Minutes, that was the message from Powell at the press conference and that has been the consistent message since the last meeting.

Happily, it appears that the markets are starting to understand this idea as a look at the Fed funds futures market shows the probabilities of rate cuts continues to decline, now 2.5% in March, 21% in May and just 66% in June.  In fact, for the full year, the market is now pricing just 85bps total, not much more than the last dot plot’s median outcome showed.

From my perspective, I remain uncertain as to why they are even considering cutting interest rates.  After all, GDP continues to power along, financial conditions continue to ease with a rising equity market, and inflation has many earmarks of remaining sticky.  Absent a collapse in the commercial real estate market that drags down a number of banks, or some other true black swan type event, it appears that the need to cut rates in the US is limited at best.  Do not be surprised to see the dot plot in March show just 2 rate cuts as the median end-2024 outcome as the hawks will have to reevaluate their stance given the economy’s strength since December.  And as I have said before, if inflation really does start to tick higher again, a rate hike seems possible, which is clearly not on very many bingo cards right now.

But really, the Fed discussion pales in comparison to the NVIDIA discussion and the impact on equity markets in general.  Since there has been very little other data even released, let’s recap the overnight session and head into the weekend.

After the massive rally in the US yesterday, with all 3 major indices setting new all-time highs, most markets in Asia were unable to follow through in any real manner, with very modest gains everywhere that was open (Japan was closed for a holiday).  In Europe, the picture is mixed with some gainers (CAC +0.6%), some losers (IBEX -0.5%) and some nothings (FTSE 100 and DAX unchanged). As there was limited data to drive things and the ECB speakers are trying to hew the line that they, too, will remain patient, nothing has changed there of late.  I continue to believe that the ECB will cut before the Fed because the Eurozone economy is in much worse shape than the US economy.  As to US futures, at this hour (7:30) they are basically unchanged.

In the bond market, after yields rising yesterday afternoon by some 6bps, Treasuries are unchanged this morning.  There are growing concerns that the supply question is going to begin to impact yields in the US, with more than $500 billion of new coupon issuance due over the rest of the year.  It is possible yields will need to rise to find buyers for all that.  As to Europe, yields there are higher by 3bps or so this morning as they missed most of the US move.

Commodity markets are under some pressure this morning with oil (-1.7%) giving up any recent strength and now lower on the week.  However, I believe it remains rangebound and need to see compelling evidence of something changing to see a real move here.  In the metals markets, gold, which slid a bit yesterday is edging higher this morning but both copper and aluminum are under pressure on demand concerns.

Finally, the dollar, which did recover yesterday to finish roughly flat on the session, is beginning to soften a bit as NY is walking in after an extremely quiet overnight session.  But overall, the movement here remains marginal with most currencies, both G10 and EMG, remaining within a +/-0.25% range from yesterday.  With monetary policies around the world seemingly on hold for now, it is unrealistic to look for large moves in the FX market.  We will need to see a change in central bank tunes to make this happen.  (either that or Jensen Huang, NVIDIA’s CEO, will need to explain that the dollar needs to move in one direction or another to boost earnings!)

There is no US data to be released and there are no Fed speakers on the calendar either.  With that in mind, equity markets are going to be the driver of note.  If the rally continues, and risk is embraced, I suspect the dollar can slide a bit further.  However, if there is any late week profit-taking, perhaps the dollar finds a bid.

Good luck and good weekend
Adf