Tag Archives: #nvidia

No Mean Feat

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Nvidia managed to beat
The whispers, which was no mean feat
But PMI data
Revealed that the beta
For growth going forward’s dead meat

The upshot is pundits believe
The market will get a reprieve
Tomorrow, Chair Jay
Could possibly say
That higher for longer’s naïve

Markets have been choppy, if nothing else, for the past 24 hours as we have seen substantial moves in Treasury (and other sovereign) yields, a major rally in gold, and the dollar fall sharply and then regain almost all of its losses.  Oh yeah, equity markets continue to rally as the Nvidia story was even better than hoped by the biggest bulls out there.  Briefly, the chipmaker exceeded earnings forecasts by a large margin and guided Q3 numbers even higher as the CEO explained that things were just getting started in the AI boom.  While he is certainly correct that there will be a lot of investment in the space going forward, it remains an open question as to whether AI will actually change the course of human history.  After all, cold fusion was recently “shown” to work amidst a great deal of hype, and that hasn’t worked out quite like the bulls expected.  

More importantly, there is a long time between now and when AI is going to result in all these great leaps forward, and we need to address the here and now.  And that is where things look a little less wonderful than they did before the week began. 

Typically, the PMI data doesn’t get as much play in the US as it does in Europe and Asia since the US has their own survey, ISM, which is reported at the beginning of each month.  But after a series of weak numbers from Europe yesterday, the US PMI data was much weaker than expected with all three indicators, Manufacturing (47.0), Services (51.0) and Composite (50.4) coming in at least a point lower than estimates and indicating that while perhaps not in a recession, the US growth picture is quite subdued.  

Again, the survey data has been pointing, for some time, to economic weakness that has not yet appeared in many of the hard numbers like NFP or Retail Sales, but the market, at least the bond market, is quickly becoming of the opinion that recession is around the corner.  One need only look at 10yr yields to see the trend.  Yesterday saw 10-yr Treasury yields slide 13bps after touching a new cycle high on Tuesday.  This morning they are largely unchanged, but the day is still young.  But the picture in Europe and the UK is much more substantial, with yields, which had been rising alongside Treasuries have fallen far more sharply.  Since Tuesday’s close, German bund yields are down 19bps, Italian BTP yields have fallen 23bps and UK gilt yields are lower by 13 bps.  The market continues to reduce the terminal rate for the ECB, now below 3.80% and for the BOE, now 5.80%, as economic weakness is clearly the key concern.

Tomorrow, we will hear from Chairman Powell, but also from Madame Lagarde and then Saturday, BOE deputy governor Broadbent will make a speech.  In other words, at this point, markets are quite keen to hear if there is any change in the G3 central bank mindset.  Based on the large retracement in yields, markets are clearly expecting a dovish outcome.  While that is certainly possible, I think there is ample room for the Chairman to maintain the current view of higher for longer absent weakness in real data.

Speaking of real data, yesterday’s NFP revisions were a bit less than the whispers, with 306K jobs removed from the record.  I expect that data was also part of the bond market rally as changes there mean more than the PMI data, at least they have so far.  In the end, the dichotomy between the bond market which is beginning to believe the recession story, and the stock market, which sees no landing at all, is widening.  Commodity markets have been leaning recession, and the dollar has been strong, which would arguably be more in tune with growth than weakness.  In other words, there is no consistency here so we will need to continue to focus on the information as it comes out.

As mentioned, stocks are on fire this morning after the Nvidia earnings with yesterday’s anticipatory US rally matched by Asian gains, especially in HK which jumped >2%, and Europe is all green, but not nearly as aggressively with gains on the order of 0.3% across the board.  As to US futures, on the back of Nvidia, NASDAQ futures are higher by 1.3%, which is dragging the SPX up as well, however the Dow is little changed this morning.  It seems the Dow’s members lack that high tech sense about them.

Turning to commodities, oil (+0.3%) is bouncing off its recent lows although remains under pressure overall on the economic weakness story.  Gold (+0.2%) which exploded higher yesterday by more than 1%, remains in demand, perhaps on the back of the BRICS meeting and some discussion there, while base metals are softer, also on the recession theme.

As to the dollar, it is stronger across the board vs. its G10 counterparts on the day, but if you look at the move over the past two sessions, it is a more mixed picture.  Yesterday morning’s USD strength was reversed in the wake of the PMI and NFP revision data and the dollar fell sharply on the day against virtually all its G10 and EMG counterparts.  This morning, it is back on the way up, against both groupings, leaving an overall mixed picture.

Perhaps this would be a good time to touch on the BRICS meeting.  For those who believe in the end of the dollar, this had to be quite a disappointment given there was virtually no discussion of a new currency.  However, they did invite 5 countries to join, Saudi Arabia, Argentina, Iran, Egypt and Ethiopia, so expansion is real. (I wonder if they are going to change the name!). However, if you are Brazil, India, South Africa, Argentina or Egypt, all democracies with elected leadership, it seems a question that needs to be asked is do they really want to get into bed with a murderous thug like Putin, who coincidentally, had a key rival murdered yesterday.  That is not a very good look.  At any rate, anything that is going on in the BRICS group remains a distant question, at least from a current risk management perspective.  

Meanwhile, the dollar’s fluctuations are going to remain beholden to the perception of the US economy and the Fed.  Yesterday’s weakness was a clear response to declining yields on the weak data.  In the same vein, look for any strong data to help boost the dollar back up.

Speaking of data, today brings a good amount with Initial (exp 240K) and Continuing (1705K) Claims, Chicago Fed National Activity Index (-0.22) and Durable Goods (-4.0%, 0.2% ex transport).  Yesterday’s other data was New Home Sales, which was slightly higher than expected, but after a downward revision to the previous month, so no real net change.

Right now, stocks are the driver, tech stocks in particular, but watch the bond market.  If today’s data hints at weakness, I suspect that yields will fall further as will the dollar.  Of course, that means stocks will probably rally on the lower yield story.  

Good luck

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Lacking In Gains

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The PMI data remains
A place clearly lacking in gains
At least cross the pond
And Asia beyond
But will the US feel those pains?

The hard data hasn’t supported
That weakness, but is it distorted?
The latest we hear
Is NFP’s near
Revisions that show growth’s been thwarted

As market participants look ahead to Friday’s Powell speech at Jackson Hole, and seemingly more importantly to Nvidia’s earnings report and forecasts this afternoon, we must look at a few things that are going on in the economy.  The most noteworthy situation is that there remains, at least in the US, a wide gap between the survey data and the actual data.  We continue to see weak readings from the regional Fed manufacturing surveys, as well as PMI and ISM data, yet the key numbers, like NFP and Retail Sales continue to perform at a better than expected rate consistently.  While we await this morning’s Flash PMI data (exp Mfg 49.0, Services 52.2, Composite 51.5), which are essentially unchanged from last month’s readings and perhaps the best in the G10, there is a story this morning that the NFP data is going to be revised down by 650K jobs at the preliminary revisions today.  That is a huge adjustment and one that would certainly call into question the ongoing strength in the labor market.

It is not yet clear if it will impact the Unemployment Rate but if this story is accurate, it will almost certainly impact some of the thinking at the Eccles Building.  Consider that, after revisions, the seven NFP numbers have totaled 1807K so far this year, with the last two months showing 185K and 187K respectively.  If that 650K number is correct, and it comes from the past two months, then they will be revised into negative territory, a very different indication than anyone has considered to date.  However, even if it is more evenly spread across the year, it still represents more than one-third of the alleged jobs created.  This feels important to me.  While I have no way of determining if this story is accurate, it is important to understand it is making its way through the markets.  If this is the case, I would expect that the market’s view on the economy, as well as the Fed’s is likely to change somewhat.  

Arguably, the market response would be to alter pricing for interest rates going forward with more rate cuts priced in and priced in sooner than the middle of next year.  At the same time, though, former St Louis Fed President Bullard was interviewed by the WSJ yesterday and was crowing about how the market got the recession call wrong and the economy is doing much better than expected.  These diametrically opposed views are the norm in the markets these days, with no clear consensus that things are going to improve or worsen.  Again, it is this situation that informs why hedges for natural exposures are so important.

Turning to the other PMI’s released this morning, the story in Europe remains one of desultory growth or outright shrinkage.  The German manufacturing sector PMI printed at 39.1, better than last month’s 38.8, but still deep in recessionary territory.  While the French and Eurozone numbers were a bit better, they were both well in recession territory.  In fact, given the weakness of this data, and the fact that the ‘hard’ data in Europe has also been soft, the new narrative is the ECB is finished.  What had been a 50:50 probability for a hike in September has fallen to a one-third chance and if we continue to see weaker data, I expect that will fall further.  As to the UK, it also saw weak PMI data, with both Services and Manufacturing below the key 50 level, and the market has pulled back to just two 25bp rate hikes over the next 6 months despite the fact that inflation in the UK remains the highest in the developed world at 6.9% core, while the base rate sits at 5.25%.

It is not hard to look at this data and understand why the dollar continues to perform well.  Despite all the problems in the US, especially regarding the debt and massive interest payments, as well as the recent credit downgrade by Fitch, the US remains the most attractive opportunity around in the G10.  In fact, this is why that story about the massive downward revision in NFP data is so important.  Without it, the distinction is very clear, buy the USD, but if it is true, opinions are likely to change somewhat.

Turning to the overnight session, while most markets managed to do reasonably well in Asia, the mainland equity markets continue to suffer with the CSI 300 down -1.6%.  In Europe, the picture is mixed with some early gains being ceded and only the UK (+0.7%) managing to stay positive while the continent slips slightly into the red.  US futures, meanwhile, are barely in the green as all eyes await the Nvidia earnings after the close.

In the bond market, it is a one-way street with yields falling across the board and in a meaningful way.  Treasuries are actually the laggard with yields only down by 5bps while European sovereigns have seen yield declines of 9bps and UK gilts of 11bps.  Clearly, the bond market is responding to the weak PMI data and anticipating weakness in the US as well.  One other interesting thing is that the yield curve inversion, which had been unwinding for the past week or two, widened again yesterday and is back above the -75bp level, having traded as low as -65bps just a few days ago.

Recession is the view in the commodity space as well, at least in energy, as oil prices (-1.5%) fall again and are now back below the $80/bbl level.  Stories of more Iranian crude making its way to the market as well as fears over reduced demand are having an impact.  Interestingly, the metals markets are holding up this morning with both base and precious varieties all in the green led by copper (+1.0%).  This is a harder outcome to square with the recession fears.

Finally, the dollar is doing quite well this morning, which given the growing risk-off attitude makes some sense.  Vs. the G10, only the yen (+0.25%) has managed any gains, and they are small.  Meanwhile, the rest of the bloc is weaker across the board led by the pound (-0.9%) and NOK (-0.9%) for obvious reasons.  In the EMG bloc, ZAR (+0.5%) is the lone gainer of note after South African data implied better times ahead.  On the flipside, though, weakness is broad based with APAC, EEMEA and LATAM currencies all under pressure amidst the risk sentiment today.

Yesterday’s Existing Home Sales data was a bit softer than expected and as well as the PMI data due, we also see New Home Sales (exp 703K) and that NFP revision.  Clearly, all eyes will be on that last piece of data given the rumors of a large decrease.  So, we will need to see how that comes.  If it is benign, then I expect risk appetite may return as the bulls look for a big Nvidia story this afternoon.  However, if that huge revision appears, I suspect risk will remain in abeyance for now.

Net, nothing has changed the medium-term view of dollar strength, but the day to day remains open to the news.

Good luck

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Alternate Ways

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In Joburg a gath’ring of nations
Is trying to firm up foundations
For alternate ways
That each of them pays
The other with no complications

Meanwhile, we are starting to hear
A story that we should all fear
The calls have come forth
Inflation that’s north
Of two percent’s where Jay should steer

The BRICS nations are meeting in Johannesburg starting today with, ostensibly, a mission to exit the dollar financial system.  While Russia has already done so involuntarily, the biggest proponent of the move is China, although the other nations are certainly willing to listen.  In addition to this goal, they will hear from many other developing nations as to whether these other nations merit inclusion in the BRICS club.

Ultimately, the problem that this disparate group of nations has is that none of them really trust any of the others.  Certainly, the historical conflict between China and India is well-known and long-lasting.  It was not that long ago that their soldiers were shooting at each other in the Himalayas.  At the same time, both Brazil and South Africa are extremely remote from the other nations and have completely different economic and political systems.  In other words, the common ground of wanting to do something about the US and its dollar, while certainly a goal, is unlikely to be enough for any of them to risk potential negative consequences of a failed concept.  

Much will be made of this meeting in the press, but we have already heard from South Africa’s FinMin, Enoch Godongwana, that it is premature for South Africa to stop using the USD and SWIFT system.  Ultimately, my strong belief is this is much ado about nothing, at least for the foreseeable future.  Perhaps in 25 years, after the 4th Turning is complete, the global currency system will be different, but not anytime soon.

Which brings us to the other story which has me far more concerned about the dollar and the US economy, the substantial increase in calls by mainstream economists to raise the Fed’s inflation target.  Understand that I have never been a fan of the target to begin with, recognizing its arbitrary nature.  However, the world in which we live has been predicated on the idea that the Fed is focused on that target and its policies are designed to maintain a relatively low rate of inflation.  Raising that target, with 3% the new favored call, is just as arbitrary as the initial level, but it changes the dynamic in the economy as well as markets.

It seems these calls are coming from the hyper-Keynesians who lean toward MMT and believe that the risk of any economic growth slowdown should be addressed ahead of all other concerns.  (It could be argued that the current administration is quite concerned that a recession next year, heading into the presidential election, would not favor President Biden’s reelection.). Now, nobody is happy when the economy slows down as it makes life difficult for us all, but one of the reasons the nation is in its current situation, with unsustainable levels of debt outstanding, is because the willingness of any politician to allow markets to actually clear (meaning asset prices fall sufficiently to hurt the 1% club) is essentially nil.  This has been the underlying driver of constant spending programs and ultimately, the cause of the ballooning budget deficits and Federal debt.  

The unspoken piece of this concept is that permanently higher inflation will reduce the real value of the outstanding debt that much more quickly, hence allowing for even more deficit spending going forward.  The fact that higher inflation is an effective tax on the bottom 99% of the income brackets, with the pain increasing more rapidly the further down that scale you look, is of no concern it seems.

Thus far, Chairman Powell has been adamant that there is no change to the goal on the table.  But I assure you that the longer it takes for inflation to retreat to its former levels, the more we will hear about this idea.  When I combine this concept with my belief that inflation is going to remain sticky in the 3%-4% range going forward for quite a while, it does not paint a promising picture.  The Fed already has credibility issues; moving the goalposts in the middle of their inflation fight would really destroy any remaining credibility they have, and that would be a real problem for monetary policy activities going forward.

But these problems are far too forward looking for today’s markets.  Instead, the future is…Nvidia!  At least, that seems to be the case right now.  As investors await their Q2 earnings release tomorrow afternoon, the working thesis seems to be that they will beat the currently inflated analyst expectations and drive the next leg of the equity bull market higher.  Now, remember, they currently trade at a 228 P/E ratio, which seems pretty high in the scheme of things, regardless of the promise of AI going forward.  (You can tell AI didn’t write this as I call into question its value here).  There has been much talk of a big ‘beat’ in earnings and that has been the catalyst for today’s equity rally.  Well, that and the fact that the Chinese seem to have instructed their ‘plunge protection team’ to get back to buying Chinese stocks as well as the yuan.  Regardless of the rationale, though, risk is definitely in favor today.

Asian equity markets were higher across the board, with the big ones all higher by just under 1%.  European bourses are similarly situated, all higher by about 1% while US futures, at this hour (7:30) are lagging a bit, only up by about 0.5%, although that was after a pretty solid performance yesterday.  Woe betide the equity markets if Nvidia misses its numbers!

At the same time, bond yields are generally lower this morning with 10yr Treasuries down 2bps from yesterday’s new closing high near 4.35%.  European sovereign bonds have also seen demand with yields sliding between 4bps (Germany) and 7bps (Italy) as a combination of mildly positive UK Public Sector Finance news and a very large Eurozone Current Account surplus seem to have bond investors quite excited.  Asia, however, did not share this excitement with JGB yields rising 2bps and getting to their highest level (0.663%) since the change of policy last month.  

On the commodity front, oil (-0.2%) has edged back below $80/bbl, representing a sharp decline yesterday afternoon after signs of increased supply started to show up in the market.  The metals markets, however, are in much better shape this morning with gold (+0.4%) back above $1900/oz and the base metals both firmer as well.  It seems that mildly lower yields and a weaker dollar are having quite a positive effect.

Speaking of the dollar, it is under broader pressure this morning vs. most of its G10 and EMG counterparts.  In the G10, NZD, AUD and SEK have all gained about 0.5% with NOK +0.4% as commodity prices find some support, and the China renewal story helps the overall global growth story this morning.    While the euro is little changed on the day, the rest of the bloc has edged higher as well.  Meanwhile, in the EMG bloc, ZAR (+1.1%) is the biggest gainer on the day, perhaps getting a little boost from positive BRICS vibes, but more likely from positive commodity vibes.  As to the rest of the bloc, APAC currencies have benefitted from the China story and THB (+0.65%) has benefitted from the resolution of the political crisis with a new PM finally being named.

On the data front, we see Existing Home Sales (exp 4.15M) and Richmond Fed Manufacturing (-10) and we hear from several Fed speakers.  However, with Powell on the calendar for Friday morning, I don’t think a great deal of attention will be paid to any other Fed speaker until he’s done.  There is a strong belief he is going to lay out the policy framework going forward, but I have a suspicion that he is happy with the current ‘guidance’ of higher for longer and may not say much at all.

Right now, risk is to the fore, and as such, the dollar is likely to remain under pressure until that changes.  It may be this way all week, or if Nvidia misses its numbers, don’t be surprised to see the dollar reverse course higher after that.

Good luck

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