Although the May Jobs report would keep the Fed on hold, the US job market may be a lot less vibrant according to this Bloomberg report. It suggests that payrolls might have grown about 60,000 less per month on average last year than the roughly 250,000 run-rate derived from the agency’s monthly employment report. The new figures, from the Quarterly Census of Employment and Wages, cover more than 95% of US jobs and are eventually used in annual revisions to the monthly data.

Treasury yields soared 10-15bps across the curve, led by the front-end, where US 2y yields climbed towards 4.90%, and 10y yields topped out near 4.44%. Positioning was stretched long US Treasuries before Friday’s US jobs data, which exacerbated the price action on the day. Fed's guidance on rate cuts next Wednesday is a key risk.

The expectations for the first Fed interest cut also shifted in a hawkish manner with the odds of a September cut declining to 50% compared to 75% on June 5th, with ~37bp (down from ~44bp on June 5th) worth of reductions priced in for the year. 

Equities

Despite recent growth concerns, the S&P 500 and Nasdaq 100 managed to finish the week positively, overcoming an early selloff on Friday caused by higher US yields. The Nasdaq closed at 17,133 (+2.4% w/w), while the S&P 500 consolidated around 5,350 (+1.3% w/w). However, the equal-weighted S&P 500 index ETF declined by 0.7% w/w, and the small-cap Russell 2000 index fell by 2.1% w/w, making them the laggards.

Next Week’s Catalysts

Monday, 6/10

• Apple WWDC keynote (1pm ET) - We expect Apple's WWDC keynote to focus on on-device AI capabilities and GenAI models. The presentation should differentiate the iPhone 16 with AI features, sparking an upgrade cycle starting in 2024. Note that AAPL has lagged Mag7 peers, so expectations remain high for AAPL to prove it will continue to be a major player in the AI conversation.

Tuesday, 6/11

• Earnings: ORCL (night)

Wednesday, 6/12

• US CPI for May (8:30am ET) - the street projects core CPI to slow to 3.5% y/y from 3.6% y/y in April, while headline inflation is expected to hold constant at 3.4% m/m. Market attention will be on any indications of a sequential slowdown in shelter inflation, as the Fed has long anticipated. Zillow rents have been rising at a pre-pandemic pace for some time, but now the new tenant rent index has softened along with general housing activity.

• FOMC decision (2pm ET) - The focus will be on the dot plot and Summary of Economic Projections (SEP). When it comes to forward guidance, the Fed has made it clear that the bar for further hikes is very high. Keeping that in mind, the market widely anticipates the 2024 one moving down, reflecting two cuts this year instead of the prior three. A drop to just one cut would be seen as hawkish - though this is not the base case. The longer-run dot shouldn’t move up materially, stands at 2.6%. GDP estimates could have modest downside risk and the unemployment rate outlook could have slight upside risk given the May reading of 4%. The inflation forecast could remain unchanged given the cooldown in growth expected.

• Earnings: AVGO, PLAY (night)

Thursday, 6/13

• US PPI for May (8:30am ET)

• BOJ decision (night)

• Earnings: ADBE (night)

Why did Treasury yields move higher last week?

The 10Y Treasury yields have been steadily climbing higher since middle of the month, and the first half of last week was no different. Here are the reasons why the yields shot up:

1. The Conference Board's confidence report for May, released Tuesday morning, showed a notable uptick compared to April, indicating that the domestic economy might be running hotter than the Federal Reserve prefers.

2. Europe’s inflation data released this week showed a notable increase, with May CPIs from France, Germany, Spain, and the entire Eurozone exceeding expectations. The EU CPI rose by 2.9% on a core basis, up 20 basis points from April and 20 basis points above expectations.

3. Australia's CPI for April also came in higher than anticipated at 3.6%, compared to the market expectation of 3.4%.

However, there was a mini-reversal in yields starting May 30th due to softer Q1 US GDP, in-line US PCE data, and downward revisions in consumption and spending data. Additionally, New York Fed President Williams struck a dovish tone in his Thursday remarks: "With the economy coming into better balance over time and the disinflation taking place in other economies reducing global inflationary pressures, I expect inflation to resume moderating in the second half of this year."

Is Soft-Landing still the base case?

Yes, a soft-landing remains the base case. Pullbacks as seen last week or in April are normal, but overall we don’t see a fundamental change in the economy’s outlook. We are still seeing a solid GDP growth, positive EPS performance from corporate America, and cooling inflation. Although recent economic data has supported a paused Fed, the bar for further hikes is too high. Further, micro data from Q1 earnings season is pointing towards a deteriorating demand landscape, which will inevitably lead to disinflationary pressure and cooler growth. At this juncture, the key question is will the market price in lower rates and Fed easing before we see negative EPS from corporate America?

As it stands, the odds of a cut by September 18th meeting are at 60% while 37bps of cuts are priced in for 2024.

Market Performance

Key Events for the Week of June 3rd

Monday, 6/3

• US manufacturing ISM for May (10am ET): The Street expects a modest uptick to 49.6 from 49.2 in April.

Tuesday, 6/4

• JOLTs report for April (10am ET): The Street anticipates a downtick in job openings to 8.3M from 8.48M in March.

Wednesday, 6/5

• US services ISM for May (10am ET): The Street expects an uptick to 50.7 from 49.4 in April.

• Bank of Canada decision (9:45am ET): Market anticipates a rate cut, although odds are lower compared to the ECB's decision on 6/6.

Thursday, 6/6

• ECB decision (8:15am ET): Expected to lower rates with forward guidance suggesting patience; no further easing likely until at least 9/12. Market assumes 55-60bp of aggregate reductions for the year.

• Jobless Claims (8.30am ET): The Street expects 220k, modest uptick compared to last week.

Friday, 6/7

• US jobs report for May (8:30am ET): The Street expects a modest downtick in job creation to +170K from +175K in April, with private job creation forecast at +155K. The workweek and unemployment rate are expected to hold steady at 34.3 hours and 3.9%, respectively, with wages estimated at +0.3%

Equity markets pulled back from all-time highs despite NVDA meeting or slightly beating extremely elevated expectations. On the other hand, hawkish data and Fed minutes spooked the market again, sending treasury yields higher and taking stocks lower (especially the Russell 2000 index), with investors cautious after the recent rally. However, by Friday, the S&P 500 ended 17 points shy of its ATH level of 5,321 points.

On Thursday, the tensions between the overall market and NVDA were reflected in the market performance, as the AI leader added roughly the GDP of a country to its market cap but the S&P 500 saw its largest daily decline in a month.

Treasuries

The 10Y Treasury yield tested the 4.5% level twice this week as the FOMC minutes and economic data had hawkish implications for the monetary policy.

There were two main reasons for the renewed sell-off (yields going higher) in Treasuries:

1. FOMC Minutes - Headlines from the Minutes noted that “various participants” would hike rates, only if “such an action became appropriate”. This was a surprise to the markets, given Powell set a very high bar for another rate hike. However, the minutes would have been considered much more hawkish if the hard data in April was hotter, but the jobs and CPI reports had dovish implications for the monetary policy. A few other highlights included:

   1. “Participants discussed maintaining the current restrictive policy stance for longer should inflation not show signs of moving sustainably toward 2 percent or reducing policy restraint in the event of an unexpected weakening in labor market conditions.”

   2. “Many participants noted signs that the finances of low- and moderate-income households were increasingly coming under pressure, which these participants saw as a downside risk to the outlook for consumption. They pointed to increased usage of credit cards and buy-now-pay-later services, as well as increased delinquency rates for some types of consumer loans.”

   3. "The economy now seems to be evolving closer to what the Committee expected."

On the other hand, the central bankers are trying their best to signal a “here for longer” narrative to keep inflation expectations anchored despite their confidence that rates at current levels are ‘restrictive’ and they are seeing labor market ‘rebalance.’

Even the Reserve Bank of New Zealand’s Orr noted, similarly, “We are confident [in inflation trends]…, we’d just like to make sure we get there without risking another blowout in expectations.”

2. S&P PMIs - Market participants were surprised to see manufacturing and services PMIs increase as “hard” activity data point to a slowdown in economic growth. The services PMI increased from 51.3 to 54.8 while the manufacturing PMI rose to 50.9 from 50.0. However, the S&P PMI series has more noise/volatility than the ISM series, which has been around for longer. has written more about this in his latest Friday Speedrun.

   

Fed Fund Rates Expectations

The odds of a 25bp cut by the September 18th meeting are about 55% compared to ~80-90% last week. The market is pricing in ~34bp of aggregate reductions for the year, compared to 45bps priced in last week.

NVDA Earnings highlights

FQ1 saw a 262% Y/Y sales increase to $26B (buy-side expectations $25B), with Data Center sales surging 427% to $22.6B ($21.1B street forecast), driven by diverse customer adoption. Nvidia expects strong demand for its H200/Blackwell GPUs to exceed supply well into next year, driven by a profound industry shift. For FQ2, Nvidia targets ~$28B (in line with elevated buy-side expectations) in sales with 75.5% gross margins. Other announcements include a 10:1 stock split (exciting for retail investors) and a 150% dividend increase (barely matters as it will be 10c). Bulls emphasize Nvidia's market dominance, while bears note high inventory levels and revenue concentration concerns.

Key Events for the Week of Monday 5/27

Tuesday, 5/28

• ECB inflation expectations (morning)

• Australia's CPI for April (night)

• Closing arguments in Trump trial; jury deliberations commence

Wednesday, 5/29

• Germany’s regional CPIs for May (morning)

• Fed’s Beige Book (afternoon)

Thursday, 5/30

• Japan’s Tokyo CPI for May (night)

• China’s NBS PMIs for May (night)

Friday, 5/31

• Eurozone CPI for May (morning)

• US PCE for April (morning)
  

The good news is that oil and gasoline prices are already falling, so we should see an improvement in the headline CPI numbers next month.

After hitting a low of 4,963pts on April 19th, the S&P 500 has rallied to ~5,300pts - a whopping 6.7% gain in less than a month. It’s not only stocks but everything is going up - gold, bitcoin, a, junk bonds, etc. Now the question is whether this rally will continue to extend or could a nice round number - DOW 40k - on a useless index and the above articles from WSJ/BBG be something of a contrarian sentiment cue?

To answer that question, let’s revisit the reasons for this rally and explore the catalysts that could extend it.

Why are stocks going up?

1. The slump in April, due to higher rates and geopolitical tensions, led to extremely negative sentiment and fear, which typically follows a period of improved sentiment as investors step in to buy risk assets at favorable levels.

2. Favorable data on inflation and the last US jobs report sent Treasury yields sharply lower, boosting stocks as lower rates are good for valuations.

3. The market was focused on the disinflation stalling narrative, so hints of resumed disinflation led to some fears abating.

4. On the back of #2 and #3, the Fed officials have been dovish, setting a high bar for resuming rate hikes. The market reflects this, with the odds of a rate cut in September at 84%, compared to 46% on April 17th.

5. Reduced geopolitical tensions with Iran/Israel stepping back, while the Israel/Gaza situation remains unchanged but has been digested by the market for months.

6. Q1 earnings were decent, with growth moderating but companies still meeting EPS expectations and increasing shareholder returns through aggressive buybacks.

7. AI events/announcements (Open AI, Google I/O) have been seen favorably so far.

What could halt this rally? or is this unstoppable for now?

Recently, some top voices in the investment world have signaled caution.

Besides Druckenmiller, 13F filings showed David Tepper slashed his holdings in Amazon, Microsoft, and Meta Platforms. David Bonderman's Wildcat Capital Management sold Meta stock, bringing his position to $23.7 million. Michael Platt's BlueCrest Capital Management dumped Nvidia and Amazon.

It wasn't just high-profile fund managers selling tech stocks. Insiders were, too...

So far, the economy and the markets have been painting a 'Goldilocks' picture with growth moderating and the disinflation phase resuming. So why are these guys so worried?

Read more

Quick Check on Markets

As of May 14th close, the Russell 2000 continued its recent outperformance, gaining 1.2% today. It is the best performing index this month, up 5.7% so far.

Sector performance

The utilities sector, usually considered as a defensive sector, has outperformed over the past 30 days amid volatility in the broader market. This strong performance is also bolstered by the increasing power demands from AI applications. It remains to be seen if a rally in Treasuries, prompted by a potential softer CPI print, will lead to further outperformance in utilities or if investors will shift their focus to cyclical sectors.

For the year, the NASDAQ index is back at the highs, while the S&P 500 index is within 10pts of its all-time high close.

Treasury yields have been range bound since the post-NFP rally, however, they digested today’s PPI data well as yields were lower by 3-4.5bps.

Dissecting PPI

Although the PPI came in hotter than expected, with the Core print at 0.4%, investors were relieved after digging into the components. Given the Fed cares about the Core PCE, the specific components which are picked from PPI include:

1. Portfolio management fees surged by 3.9%, partly catching up from previous lows and likely to reverse in May.

2. Physician services showed a modest increase of 0.2% with upward revisions for the previous month.

3. Airfares were revised lower and fell further in April.

Note that Fed Chair, Powell, spoke today after the PPI release and his comments were perceived dovish – his personal forecast is that the disinflationary process will resume (due in large part to the fact that rent as calculated in the CPI/PCE is artificially inflated) while the odds of another rate hike are low. On labor, Powell noted that demand for workers is cooling off “pretty substantially” while wage growth eases.

CPI Preview

After three months of stronger core-CPI increases, rounding to 0.4%, the street is forecasting a modest slowing to 0.3% increase in April. From a markets perspective, the odds for a cut in September stand at 80%, so an inline or a softer CPI print can further increase the odds. Given April is essentially the last inflation data before the June FOMC meeting, the modest slowing in April alone will not increase the chance of a cut in June FOMC, but the Fed might be able to push back on keeping policy rates restrictive for longer given the softness in growth.

Are Tech Stonks heading back to the moon 🚀?

US major indices have rebounded from their mid-April lows, fueled by signs of disinflation, easing geopolitical tensions (the Israel-Iran incidents were more symbolic than escalatory), a retreat from peak hawkishness by the Fed, and stronger-than-expected earnings, providing investors with some relief.

The NASDAQ index, just shy of its all-time highs, boasts an 8.8% YTD gain despite mixed results from the Mag 7 group. However, the landscape isn't entirely rosy. The post-earnings tumble in META shares, coupled with remarks from Drunkmiller on CNBC, underscore the potential near-term volatility in the AI sector. NVDA's upcoming earnings on May 23rd and heightened S&P 500 forward implied volatility suggest the market is bracing for significant moves. Similarly, PLTR’s decline post-earnings, despite exceeding forecasts and elevating guidance, signals a possible retreat in the AI trade.

Next leg higher for S&P 500

Since its recent trough on April 18th, the S&P 500 has rallied 4.4%, though it has slightly retracted from the 5200 level in today’s session. This pause, just ahead of upcoming inflation data (PPI on 05/14 and CPI on 05/15), seems healthy. An inflation report in line with expectations could temporarily boost stocks as markets cheer the dip in Treasury yields. Yet, signs of renewed disinflation could increase the odds of more fed fund rate cuts, bolstering stocks amid growth concerns.

Currently, the market anticipates a 42bp cut this year, with July seeing a 33% chance and September an 82% probability of rate cuts.

Risk/Reward on Treasuries

The US Treasury market was hit hard in recent months as the hot inflation data along with negative sentiment pushed yields to highs not seen since September 2023.

However, several factors now tilt the risk/reward balance in favor of Treasuries:

1. Inflation has likely peaked as evidenced by falling commodity prices (Bloomberg Commodity index below)

2. Real world prices appear to have peaked:

   1. Real-world price indicators, such as the Manheim Used Car Index for April, suggest ongoing deflation in the auto sector.

   2. Auto insurance premiums have likely reached their peak.

      

3. Shelter inflation - most publicly traded housing rental firms show a deceleration in revenue and rental growth which is not yet reflected in CPI/PCE data.

4. Red flags from Q1 earnings and a softer-than-expected April jobs report highlight the risk on the growth front

5. Treasury auctions aren’t growing but the pace of QT is set to slow meaningfully

6. Most Fed speakers have a pretty high bar for another rate-hike

On the other hand, the US fiscal landscape is dominated by substantial deficits and a noticeable lack of political will for significant fiscal reforms. This suggests that the record-low Treasury yields of the previous decade are unlikely to recur under the current fiscal climate.

The upward momentum was fueled by a combination of a dovish stance from the Federal Reserve and a series of positive developments in the AI space. Noteworthy events included Micron Technology's (MU) earnings report, NVIDIA's (NVDA) GPU Technology Conference (GTC), and an AI collaboration headlines between Apple (AAPL) and Google (GOOG). These factors collectively inspired confidence among investors, leading to substantial gains.

Despite the week's bullish trends, concerns lurked beneath the surface. Concerns in the consumer sector resurfaced, as reflected in the negative performance of several companies. Notable downturns were observed in Lululemon Athletica (LULU) with a 10% decline, Dollar Tree (DLTR) falling by 13%, and Nike (NKE) dropping by 11%, all based on one-month return figures. This divergence highlights the complex dynamics at play in the current market landscape.

Is the US Consumer Weakening?

Given the negative consumer data points, particularly from a slew of downbeat earnings reports, an examination of some macro data reveals that in the short term, consumers should be ok, but things could deteriorate if inflation picks up and the Fed is forced to change their stance.

• The average refund amount as of March 15, 2024, is 6% higher than last year, which could be a tailwind for consumer spending in March. (Source: IRS)

• Additionally, the Child Tax Care credit awaiting a Senate vote after its passage in the House, could provide much-needed help to the lower-end consumer.

• The balance sheet (first graph below) of households and non-profit organizations shows that their net worth has increased to $156T in 4Q 2023 from $152T in Q1 2022 (last peak). Despite most of the change being attributed to the gains in stock markets (second graph), the checking account balance (third graph) is at $3.9T (compared to $980B pre-covid). These elevated cash balances could still support consumer spending.

FOMC Recap

Going into the FOMC, the market was prepared for a hawkish stance, instead, it was surprised by an unchanged dot plot indicating 3 cuts (~75bps) and a dovish press conference by Powell. Key highlights include:

• GDP growth has been revised up by the Fed to 2.1% this year, from 1.4% in the December forecast. The GDP forecasts for 2025 and 2026 were also raised, pointing to upside risks for growth.

• The dot plot indicates a 75bp easing for each of 2024, 2025, and 2026 — this is one fewer easing than previously forecast for 2025 and 2026 — and raised the longer-term rate by 10bps to 2.60%.

• On inflation, the core PCE forecast for 2024 was raised from +2.4% to +2.6%. Powell also reminded us that getting inflation back to target is expected to be a gradual process - not something that happens overnight. Although he said that the Fed is not going to dismiss any data, but also commented that they are not going to overreact to ‘bad inflation.’ When asked by the WSJ’s Nick Timiraos (aka Fed whisprer) how much calendar effects were imputed into the Fed’s view on inflation, Powell suggested that there is reason to expect there were seasonal effects at play in January, while February’s core PCE below 30bps “was not terribly high”.

• When queried whether labor market strength might deter Fed cuts, Powell provided a dovish "not necessarily" in response.

• This line from Powell stuck out in particular: “things like the low hiring rate, people have made the argument that if layoffs were to increase, that that would mean that there would be fairly quick increase in unemployment. That is something we're watching [but we're not seeing].”

• On QT (Quantitative Tightening), Powell said that it would be appropriate to slow the pace of runoff “fairly soon”.

• Bottom line: The Fed is prepared to cut possibly by June, but May can’t be ruled out. They still think that inflation has eased substantially and Powell didn’t seem to be too bothered by recent hot inflation data. Instead, the Fed is more worried about unexpected weakness in the labor market.

Treasury Market Reaction to FOMC

The yields on the 2Y and 10Y bonds fell by 12-14bps over the week.

The market is pricing in a 75% chance that the Fed will cut by June. For 2024, the market is pricing in 85bps of cuts vs. 72bps pre-FOMC.

What’s next for US equities?

The bulls are saying that Powell’s dovishness, along with the lack of “sell-the-news” price action in AI-related names is a net positive for stocks. The prospect that not even higher growth or a strong labor market will deter the Fed from making cuts is seen as a bonus by the bulls. Meanwhile, Powell dismissing the Jan/Feb hotter inflation print leads me to believe that the next major catalyst for the Fed is the March CPI report to be released on April 10th.

Conversely, the bears are arguing the market's current valuation (S&P 500 ~5,300pts), the market looks less appealing due to its overbought condition and crowded sentiment. On AI, the spending on data centers and chips is propelling the sector, but there is a big question mark on returns from all this spending. The recent underperformance in consumer-related retail stocks underscores the potential volatility; a miss in growth expectations or earnings could trigger a selloff.

This interplay of views underscores the nuanced and uncertain path ahead for U.S. stock markets.

One other factor to consider is Fed’s apolitical stance, if the Fed doesn’t start to cut in June then it will probably lose its chance to cut this year without appearing political. Rest of the meetings for the year are on Jul 31, Sep 18, Nov 7, and Dec 18th. Two of the four meetings are too close to the US Presidential elections, so it could be seen as biased if it moves aggressively starting July.

This morning, WSJ’s Nick Timiraos article got a lot of attention as he mentioned that the Fed is more concerned about growth and possibly a recession if it keeps interest rates too high, rather than inflation.

FOMC Preview:

1. No change to rates or monetary policy at this meeting

2. JPM’s Feroli sees better than 50% chance that the dot plot reflects a reduction from three 2bps cuts to two. Meanwhile, Goldman and Citi expect Fed to remain on track to cut three times this year.

3. With all the debate about higher r*, could we see longer-run dots increase from 2.5%?

4. The most important sentence is the guidance that “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”

5. The last Summary of Economic Projections from the December 2023 meeting showed:

   1. Median unemployment rate expected at 4.1% by end of 2024.

   2. Median Core PCE was at 2.4% by end of 2024 - most recently we got two hot inflation reports, so it is possible that the committee places more weight on recent data and increases their forecast.

   3. Median GDP projection was at 1.4%, given Fed’s concerns on growth most recently, we don’t expect major changes here.

6. Investors will also look for clues from Fed Chair Jerome Powell’s news conference whether the first cut is still possible in June, as futures markets currently anticipate, or later. This could be hinted if the Powell mentions that next few meetings could be considered ‘live’ for potential cuts.

7. An “in-depth” discussion of balance sheet policy may result in the release of principles for slowing and eventually ending balance sheet reduction.

Despite FOMC looming over tomorrow, the 20Y US Treasury bond auction cleared 2.1bp through (ie more demand than anticipated for bonds). Sending treasury yields lower across the curve. However, yields have increased dramatically since last week, indicating that market is pricing in a hawkish FOMC.

NVDA GTC Keynote:

No surprises - Nvidia’s next-generation graphics processor for artificial intelligence, called Blackwell is impressive and keeps NVDIA ahead of competition in the AI chips race. Blackwell contains 6 new technologies and will enable AI training and real-time LLM inference for models scaling up to 10 trillion parameters. The Verge has a good article on its technical capabilities.

The CEO Jensen Huang told analysts at an annual conference that data center spending was about $250BN last year and growing 20% a year. Nvidia could capture a large portion of the new spending, Huang said, because the company was making an ever-larger amount of equipment and software for data centers, from GPUs to networking chips and central processing units. He noted that the successors to H100s would cost between $30,000 and $40,000—below what some analysts had expected. Huang later told analysts that he wanted to price new chips to appeal to the widest possible set of customers. The H100 chip costs about $25,000 each, according to analyst estimates. Nvidia's Chief Financial Officer Colette Kress told financial analysts on Tuesday that "we think we're going to come to market later this year," but also said that shipment volume for the new GPUs would not ramp up until 2025. Among the many organizations expected to adopt Blackwell are AMZN, DELL, GOOGL, META, MSFT, OpenAI, ORCL,TSLA.

What does this mean for the stock?

While the Blackwell product is revolutionary, but was widely expected and doesn’t change the AI boom narrative drastically. The stock fell ahead of the GTC event, but rose in today’s session along with rest of the tech complex. Ending at $893, it is below the all-time-highs of $927 seen on March 6th. We might see some more profit taking given a solid 82% YTD gain so far.

Trump wins Colorado ballot disqualification case at US Supreme Court

The US Supreme Court barred states from disqualifying candidates for federal office under a constitutional provision involving insurrection and reversing a judicial decision that had excluded him from Colorado's ballot. "We conclude that states may disqualify persons holding or attempting to hold state office. But states have no power under the Constitution to enforce Section 3 with respect to federal offices, especially the presidency," the unsigned opinion for the court stated. This was widely expected, and the ruling came on the eve of Super Tuesday, the day in the U.S. presidential primary cycle when most states hold party nominating contests. The Supreme Court resolved the Colorado ballot dispute speedily, a timeline that stands in contrast to its slower handling of Trump's bid for immunity from criminal prosecution in a federal case in which he faces charges for trying to overturn his 2020 election loss. Trump's trial has been put on hold awaiting the outcome of the Supreme Court's decision - a benefit for him as he campaigns against Biden.

Meanwhile, major polls and the betting markets continue to show Trump in the lead against Biden. NYT piece highlights some recent poll results.

How Frothy are the Current Equity Markets?

After my post from the weekend, I received some feedback from fellow investors and strategists on comparing the current price action to past bubbles. It was a healthy debate and the major points they raised were (and my rebuttals in italics):

1. Absence of Speculative Mania: Unlike past bubbles, there is no widespread speculative mania and leverage levels are not at extreme highs. Yes, NVDA is not a sign of mania but CVNA and PEPE meme coin are signs of mania - so there are some signs of frothiness.

2. Solid Financial Fundamentals: The market's growth is supported by robust earnings and significant free cash flow, especially among leading tech companies, contrasting with the speculative basis of the dot-com bubble. Agreed

3. Reasonable Valuations: Current tech stock valuations, while high, are not at the unsustainable levels seen in the late 1990s. Price-to-earnings ratios and free cash flow yields indicate more reasonable valuations. Again, it depends if you are looking at Price/Earnings ratio of MSFT (37x) and META (34x) which are still “reasonable”, whereas AI names like NVDA (69x) and SMCI (71x) give me a pause.

   

In terms of catalysts for the market to pullback, a softer jobs print or pricing out of the remaining 90bps of Fed Funding cuts on the back of inflation reaccelerating could do the job, so the next few weeks will be important to see which way the market is going to head.

US Labor Market – signs of softening?

The US jobs data for February will be released on Feb 8^th, and consensus expectations are for the economy to show an additional 200k in jobs compared to 353k in January. However, the continuing jobless claims 4-week average is hovering around 1.9m – the highest since 2022, so could this be an early indicator of the softening in labor market?

Will the Fed cut in 2024 as expected?

Renewed economist, Torsten Slok’s latest note to clients indicated that the Fed will spend 2024 fighting inflation, which will prevent the Federal Reserve from cutting rates. His argument is based on two factors:

1. Fed’s December pivot towards easier monetary policy in December 2023 has given an additional tailwind to the economy, financial/capital markets, and financial conditions. “All that is likely to continue to be supporting growth in consumer spending, in capex spending, in hiring for most likely the better part of this year.” Sloak said.

   

2. The market has declared victory over inflation, whereas it appears that inflation is becoming a problem again. Slok’s comments come after the Thursday release of the Fed’s preferred inflation metric, the core personal consumption expenditures price index, showed an increase of 0.4% in January, the fastest pace in nearly a year.

   

On the back of the PCE release, multiple Fed officials encouraged observers to ignore January inflation data as “noise.” However, the data for February to be released in the coming weeks will tell us whether the recent data was flattered by seasonals or if there was a real signal there. Moreover, a continued rally in risk assets should push upward pressure on inflation, causing rate cuts to be priced out.

Everything Rally - are Diamond hands back?

This week we saw both S&P 500 and NASDAQ reach fresh highs along with gold. Meanwhile, Bitcoin is $7k off its all-time high of $69k.

This feels similar to 2021 for a couple of reasons:

1. Bitcoin’s rise above $60k on “scarcity” while meme coins ( Dogecoin, Shiba Inu, and Pepe) rally in sympathy.

2. Demand for call options is surging. Appetite among retail traders for bullish call options is near early-2022 levels, per JPMorgan Chase & Co. citing data on flows from options customers with fewer than 10 contracts. Just head over to Reddit wallstreetbets to see all the action. Although we haven’t reached GME insanity, the performance of stocks on the back of call options can’t be ignored.

   

3. Retail favorite stonks like Carvana and Beyond Meat rose 76% and 61%, respectively in February - burning short sellers along the way.

As per Bloomberg, last July, when similar risk-taking behavior emerged among day traders, the S&P 500 peaked later in the month before falling into a 10% correction.

Gold Shinning Again?

Gold aka “boomer bitcoin" has been lagging behind other macro asset classes since it made its last high of $2075/oz in 2020. It closed at $2,083/oz on Friday, so let’s see if this rally will continue.

Overall, while markets are celebrating near-term recession risks receding, the risk that central banks will have to hold rates higher for longer, or potentially even deliver further hikes, may be rising.

Next Week’s Events

March 4/5th - China Government Summit

March 5th - US ISM Services

March 6th - US ADP Employment, Bank of Canada decision

March 7th - ECB Interest Rate Decision; US jobless claims; Powell testimony to Congress

March 8th - US Nonfarm payrolls (jobs report)

In equities, the S&P 500 is hovering just below its all-time highs, having traded in a tight range since NVIDIA results last week. Under the surface, I am seeing some rotation as TSLA which didn’t participate in the MAG7 rally YTD is rallying this week. Though for the year, TSLA is still down 18%, the biggest laggard following AAPL (-2.5%) and GOOG (-1.6%).

On the rates side, the 10Y treasury notes are trading close to 4.30% as growth and inflation expectations continued to move higher.

With regards to Fed Funds pricing, the amount of Fed cuts priced in 2024 inched down to 77bps, so now essentially in line with the 75bps of cuts penciled in by the median FOMC dot back in December. Given the progress we have seen so far, it will be hard for the market to price in even fewer cuts even if the PCE number is hotter than expected tomorrow.

On the economic data front, the Conference Board’s latest consumer confidence reading for February was down to 106.7 (vs. 115.0 expected), which is the first decline in four months. However, the Atlanta Fed’s GDPNow model marginally upgraded its estimate for Q1 growth to an annualized 3.25%. If realized, that would be a third consecutive quarter with growth above 3%.

In Japan, inflation slowed less than expected in January, rising +2.2% y/y (vs. +1.9% expected) though down from the previous month’s +2.6%. In response, the yields on Japanese Government bonds rose to their highest levels as the likelihood of BOJ exiting its negative rate policy by April has risen substantially.

Moving to politics, in the recent Michigan primary elections, both President Joe Biden and the leading Republican contender, Donald Trump, secured victories within their respective parties. However, the election outcomes revealed a notable level of dissatisfaction among both Democratic and Republican voters regarding their anticipated nominees. Progressive activists and Arab-American leaders had called on Michigan's Democrats to cast their votes as "uncommitted" rather than in favor of Biden, signaling concerns about his potential re-election campaign against Trump in this pivotal battleground state. With the majority of votes tallied by Wednesday morning, approximately 13 percent of primary voters opted for "uncommitted" — a figure significantly lower than Biden's 81 percent but nonetheless representing over 100,000 individuals in Michigan expressing their discontent with the President. This internal discord presents a significant challenge for Biden's campaign, sparking worries among some Democrats about his ability to rally the party's center-left coalition in his favor come November. The election results underscore the precarious nature of the political alliances formed in Michigan, a key state for the upcoming presidential election. Both Biden and Trump face the risk of losing crucial support; Biden won Michigan by around 150,000 votes in 2020, while Trump had previously secured the state by approximately 11,000 votes in 2016.

Elsewhere, major news outlets reported that the Republican Senate leader Mitch McConnell will step down as his party’s leader after the November election.

Federal Reserve officials expressed caution about rate cuts. Vice Chair Jefferson warned against overly easing policies in response to fluctuating inflation, suggesting potential cuts later in the year, reflecting a somewhat hawkish stance. Philadelphia Fed President Harker's remarks were mixed, advising patience with rate easing, yet hinting at possible cuts in the near future. Governors Waller and Kashkari emphasized a patient approach to policy easing, focusing on ongoing inflation challenges.

Market reacted by cutting rate cut expectations further, for 2024 we are pricing in 81.5bps in cuts, which is less than half what priced at the peak on January 12. As a result, 2yr Treasury yields rose +4.6bps to 4.71%, their highest since the December Fed meeting. Meanwhile, the 10Y yields have hovered around 4.30% amid softer PMI data.

So far equities have decoupled from the rates market as enthusiasm about AI has sent valuations higher, ignoring the higher for longer rates narrative which is building in the background. The biggest risk in my opinion is that the Fed has to stay put for all of 2024, without delivering any rate cuts.

Across the pond in Europe, preliminary February PMIs indicated modest growth, influenced by services sector performance. European Central Bank officials prioritized rate stability over early cuts, amidst signs of inflation aligning with targets.

NVDA Profit Taking

This morning the stock printed a high of $823 but has since then reversed all the gains and is trading at $777 (1% lower). There isn’t much new news, so the only way to explain what is happening in this market pre and post-NVDIA earnings is through memes at this point.

Pre-earnings

Earnings released

Post earnings

Stock dropping to $777 today after hitting $820

NVDA is trading ~15% higher at a new high as I type this note, fully recovering its 2-day route ahead of the print. Revenue beat of $2bn and meeting buy-side expectations of $24bn for the next quarter proved to be very good from investors’ perspective. The setup going into the print was that we were going to get another Beat and Fade (NVDA beating earnings and investors taking profits by selling stock at higher prices) - as we saw in the last two quarters. Looking at the market reaction over the last 72 hours, in hindsight, it is clear that the reaction was pulled forward.

Moving to economic data, US initial jobless claims released this morning continued to show a strong labor market despite a growing number of high-profile job cuts at large companies. Initial claims decreased by 12,000 to 201,000 in the week ending Feb. 17, according to Labor Department data released on Thursday. Continuing claims, a proxy for the total number of people receiving unemployment benefits, dropped to 1.86 million in the week ending Feb. 10, also the lowest in a month.

FOMC Minutes: In their January meeting, Federal Reserve officials expressed reluctance to hastily cut interest rates due to persistent inflation risks, maintaining rates at a 23-year high between 5.25% and 5.5%. This cautious stance comes amid moderate progress in inflation control and full employment achievement. Market reactions to the Fed's minutes were notably muted, with minor effects on U.S. stocks and Treasury yields. The Fed's ongoing quantitative tightening program, aimed at reducing its pandemic-era expanded balance sheet, was also discussed, hinting at a potential slowdown in the future. The Fed acknowledged significant strides towards their 2% inflation target, but also noted economic risks, including decreased consumer spending and financial strains on lower and middle-income households, evidenced by increased reliance on credit and rising loan delinquencies, highlighting underlying economic vulnerabilities.

Meanwhile, major investment banks economists have moved back their expected timing of the first U.S. interest rate cut to June.

NVDA is trading 1.7% lower at the time of print, after losing 4.3% in yesterday’s session. The stock has gone from being the 5th largest company in the US to initially the 4th and then the 3rd largest but it slipped back to the 5th again. This was the worst daily performance since last October. Option implied move suggests a swing of ~11% in either direction. Given its high weight in the S&P 500 index, this implies a potential 0.45% impact on the index.

Overnight, Chinese stocks rose (CSI 300 closed +1.35%, Hang Seng +1.57%) driven by the property sector. Reports that banks have approved $17bn of loans for some property projects after the 5y LPR cut, led to some optimism in this space.

Thomas Barkin, President of the Federal Reserve Bank of Richmond, commented on the current economic situation, noting that while there has been an overall improvement in inflation, certain sectors still exhibit high price pressures. Recent government data indicated a decrease in consumer prices for goods in January, but this was outweighed by increases in shelter and service prices. Barkin expressed concern that once the deflation in goods prices ceases, the elevated prices in shelter and services could pose a problem. He emphasized the importance of focusing on short-term inflation figures rather than year-over-year data. Barkin, who is a voting member on monetary policy decisions this year, previously stated that the Federal Reserve should delay any interest rate cuts until there is substantial evidence that inflation is consistently moving towards the central bank's 2% target. This stance is in line with the views of several of his colleagues. In the discussed interview, he did not make specific comments about the future path of interest rates.

There wasn’t too much data yesterday, although the US Conference Board’s Leading Index fell for a 22nd consecutive month in January, with a -0.4% decline (vs. -0.3% expected).

In other news, the US mortgage rates have risen back above 7% as hopes of a near-term rate cut diminished and the latest economic data suggested that rates could remain higher for longer.

For today’s economic releases, FOMC minutes print this afternoon. From investors’ perspective, the minutes at this point are stale as we saw strong activity and hot inflation reports since the meeting. However, any insights on the QT discussion could give us some more color on the monetary policy.

Other news:

Palo Alto Networks shares fall 25% after revenue warning FT

Nvidia-linked stocks drew big bets days before filing sparked rally FT

HSBC profits plummet 80% after charge on Chinese bank stake FT

Private equity turns to new fundraising tactics in tough market FT

Private Equity Payouts at Major Firms Plummet 49% in Two Years BBG

Biden’s EV Dreams Are a Nightmare for Tesla and the US Car Industry BBG

Homebuilder Toll Brothers Hits Record With Strong Demand Outlook BBG

U.S. to Invest Billions to Replace China-Made Cranes at Nation’s Ports WSJ

Lessons From a Three-Decade-Long Stock Market Disaster WSJ

Apart from NVDA, the macro focus has been on the complicated picture of 'disinflation’ and the path of central banks’ monetary policy. Overnight, the Swedish CPI print for January showed a larger-than-expected increase to +5.4% (vs. +5.0% expected). That led to growing doubts about how soon the Riksbank would be cutting rates and added to fears that the global inflation path would still be bumpy this year, not least after the US CPI and PPI prints last week. Then at 0830hrs, the annual inflation rate in Canada fell to 2.9% in January of 2024, the lowest since June, from 3.4% in the previous month, and well below market expectations of 3.3%. The result marked a sharp reversal from the hot reading in December, revamping hopes of disinflation in the Canadian economy and strengthening the case for more accommodation from the BoC as it attends to increasing growth concerns.

Elsewhere, the minutes of the Reserve Bank of Australia’s recent meeting indicated that the central bank remains inclined towards hiking interest rates further as it is not sufficiently confident that inflation is on track to return to its target range within the next couple of years.

The net result of the above from a US market perspective has been a rally in rates complex with yields on the 2 Y and 10Y notes lower by 5bps and 3bps respectively. Total Fed cuts priced for 2024 increased from 3.5 cuts to 3.75 cuts of 25bps each.

On the micro front, in its recent earnings report, Walmart observed a nuanced picture in its U.S. operations. The company's general merchandise category has reached a "deflationary position," although the rate of price decline has moderated in the three months leading up to January. While general merchandise prices are lower than last year, the decrease isn't as steep as previously projected at the end of the last quarter. In contrast, prices for food and consumables are slightly higher compared to a year ago.

In addition to these inflationary trends, Walmart's forecasts for first-quarter and full-year 2024 sales are slightly above expectations, indicating a modestly positive outlook on consumer strength. However, the company also highlighted that the uptick in general merchandise sales is predominantly driven by higher-income households, suggesting a bifurcation in consumer spending patterns. WMT’s stock is trading 3.6% higher as the piece goes to press.

In China, the PBOC cut the benchmark five-year loan prime rate (LPR), the peg for most mortgages, by 25bps to 3.95%, marking its first cut since June, and more than expected. They kept the one-year LPR, the peg for most household and corporate loans, unchanged at 3.45%. There wasn’t a strong market reaction as the economy needs more fiscal stimulus for its people to gain confidence in the property sector, rather than monetary support due to low demand for debt in the region.

Other news:

Today's cuts should allow more cities to reduce minimum mortgage rates BBG

Foreign direct investment into China slumps to worst in 30 years BBG

"The Year of Cash wasn't a flash in the pan." BBG

Markets Start to Speculate If the Next Fed Move Is Up, Not Down BBG

Fears of a systemic credit event are growing among fund managers BBG

Retirements spike again as stock market booms Axios

The combined market capitalization of the so-called Magnificent 7 would make it the second-largest country stock exchange in the world CNBC

Data show the US economy is booming. Wall Street thinks otherwise WSJ

In 2030 you may be driving a desk, literally WSJ

How companies are starting to use generative AI to improve their businesses WSJ

Saudi Arabia: "It’s mind-boggling the amount of stuff that’s trying to be done here" WSJ

Bad property debt exceeds reserves at the largest US banks FT

Investors shun the riskiest US corporate bonds on default fears FT

Investors plow record amounts into US farmland FT

Natural Gas prices plunge as surging production and lower demand (US set for warmest winter on record) weigh FT

Year of the Dragon opens on a high note for China's economy FT

For Michigan, EV's are either a blessing or a job killer NYT

China's securities watchdog solicits proposals to revive markets RTRS

Chinese scholar warns of the 'most significant crisis of our time' SCMP

Are Lithium stocks so bad, they're good? WSJ

China cut the 5-year Loan Prime Rate (LPR) by 2.5bp to 3.95% from 4.20% in February, the first cut since August and the most on record. The 1-year LPR held at 3.45%. WSJ

Let’s recap what happened this week

A hot CPI data print on Tuesday caught the risk markets by surprise as the S&P 500 fell 1.4% on the day, slipping under the 5,000 level. However, that move was short-lived as the dip was bought quickly sending the S&P 500 index to new all-time highs. Softer-than-expected US retail sales print threw a complicated message on the growth front, but also gave fuel to the narrative that the disinflation process is going to be bumpy but the trend is still downward. The small cap index Russell 2000 also reached a YTD high yesterday after seeing its worst fall since 2022 during the CPI rout.

This morning, the market got another reminder of the possible re-acceleration of inflation as the January US PPI came in higher than expected. Together with the CPI print from earlier in the week, the significant beats in Jan PPI confirmed expectations for a solid core PCE (to be released on Feb 29). Note that PCE is also the Fed’s preferred inflation gauge and current data suggests that the Fed will remain hawkish or rather patient when it comes to cutting Fed Funds rates. Sharing an interesting thread that pushes back on the standard explanations for why US disinflation will continue.

This morning, Atlanta Fed’s President Bostic noted he was modestly surprised by the data "but not in a big way." He foresees more declines in inflation but reiterated the path back to 2% could be uneven. Bostic said that he needs more data to convince him inflation pressures are truly falling, but also mentioned that "My outlook is to start the normalization, start returning our policy stance to a more neutral stance in the summertime," in a CNBC interview. He also cited the Dallas Fed's trimmed-mean PCE price statistic, which posted a 2.6% annualized increase in December, identical to its reading over the past six months, as a reason to be not too optimistic that inflation goals have been achieved. The link to his speech from yesterday is worth a read.

Impact on Rates Market

While risk markets have been quite unfazed by the hotter inflation data, the rates market has repriced significantly this week.

In the short end, the number of cuts priced in for 2024 has decreased to 3.5 cuts (88bps) as of Feb 16th vs. 6-7 cuts priced at the beginning of the year. Meanwhile, the first cut has been pushed to June from May earlier in the week.

The yields on the 2Y and 10Y notes are also trading at 4.65% (+18bps) and 4.29% (+10bps), respectively.

Earnings Season Update

Overall, 79% of the companies in the S&P 500 have reported actual results for Q4 2023 to date. Key takeaways from the season are:

• Of these companies, 75% have reported actual EPS above estimates, which is below the 5-year average of 77% but above the 10-year average of 74%. In aggregate, companies are reporting earnings that are 3.9% above estimates, which is below the 5-year average of 8.5% and the 10-year average of 6.7%.

• The index's fourth-quarter earnings have improved, with a current blended growth rate of 3.2%, up from 2.8% last week and 1.5% at the quarter's end.

• Looking forward, analysts are optimistic, projecting earnings growth of 3.9% for Q1 2024 and 9.0% for Q2 2024, with a 10.9% growth expected for the entire year of 2024. However, this optimism is tempered by a relatively high forward 12-month P/E ratio of 20.4, which is above both the 5-year and 10-year averages, suggesting that stocks might be valued more expensively compared to historical norms. This could imply investor confidence in future growth or a potential overvaluation in the market.

Source: Factset

Chinese stocks outperform US markets

Chinese ETFs rose this week after remaining closed for the Lunar New Year holidays. The price action was supported by a Bloomberg article noting a resurgence in travel during China's Lunar New Year holiday, signaling a possible rebound in consumer spending in the struggling economy. Official data shows over 61 million rail trips in the holiday's first six days, the highest in five years and a 61% increase from the same period in 2023, highlighting a shift in consumer behavior. Concurrently, the WSJ reported that the Chinese government is poised to significantly expand its real estate involvement, potentially acquiring distressed projects or building more subsidized housing, as part of President Xi Jinping's initiative to increase state control over the sector.

Major events for next week

NVDA earnings on Feb 21st - The expectations are probably much higher this time around compared to the last two quarterly earnings reports as the stock has rallied 48% since the last earnings release.

FOMC Minutes on Feb 21st

Other news:

Funds from Japan and China dumped record amounts of US stocks last year to mine double-digit returns BBG

Is the US power grid at risk, along with your home? BBG

How distressed debt brought a billionaire’s satellite empire crashing to earth FT

US investors in emerging markets switch to ETFs that exclude China FT

Pimco joins JPMorgan and State Street in quitting climate investor group FT

Text-to-studio quality short films are now a web link away: NYT

Some budget-stressed small colleges have begun selling off some of their real estate holdings to get the bills paid NYT

UAW workers at Ford's Kentucky truck plant threaten strike next Friday RTRS

The BOJ is on track to end negative rates in the coming months- despite the economy's slip into recession RTRS

Fed's Barr says supervisors more aggressive, honing in on interest rate risk RTRS

The price cuts keep coming for America's EV-makers WSJ

Realtors are in crisis and homeowners could be the big winners WSJ

The impact of recent immigration on US economic output, productivity and wages: WSJ

S&P 500 Reaches New All-Time-Highs

The S&P 500 Index achieved a significant milestone, surpassing the 5000 level for the first time. This was a result of a 1.37% gain over the week, marking the fifth consecutive week of gains and the 14th gain in the last 15 weeks. The equal-weighted S&P 500 increased a more modest +0.47%.

Mag7 Outperformance

The equity market rally was concentrated, particularly in the Tech sector, which saw a 1.50% increase in the S&P. This was largely driven by the "Magnificent Seven" and the semiconductor sector, highlighted by the Philadelphia Semiconductor Index's 5.32% jump following strong performance from ARM and Nvidia's discussions with OpenAI.

On Friday, there was a rebound in U.S. regional banks, evidenced by the regional banking KBW index which climbed 1.85%. However, this index still closed the week 1.31% lower. Notably, New York Community Bank saw a significant increase of 16.9% following the announcement that its management had acquired more shares. Despite this uptick, NYCB's weekly performance showed a decline of 18.9%, highlighting ongoing instability in the Commercial Real Estate (CRE) market.

Fed Funds Rate Expectations

Investors adjusted their expectations for future rate cuts due to stronger-than-anticipated US economic data. This led to an increase in the anticipated rate for the December 2024 meeting and a similar shift in Europe, where expectations for ECB rate cuts were scaled back.

Rise in Treasury Bond Yields

Bond yields saw a notable increase, with the 10-year yields rising by 15.4 basis points and the 2-year yields by 11.6 basis points. This was partly influenced by the revisions in US CPI data, which initially triggered a relief rally in yields but ultimately reversed to end higher.

Surge in Oil Prices and Geopolitical Factors

Brent crude oil prices surged by 6.28%, influenced by geopolitical tensions, including Israel's rejection of a ceasefire offer from Hamas and potential US actions to strengthen sanctions against Iranian oil. This contributed to a more volatile and uncertain global economic environment.

This week’s events

NY Fed 1Y Inflation Expectations (Today)

US CPI (Tuesday)

Retail sales, Industrial Production, Factory Orders (Thursday)

Housing data throughout the week

US PPI (Friday)

University of Michigan consumer survey (Friday)

Fed Speaker (today)- Bowman (hawk), Barker (neutral) and Kashkari (hawk).

On the regional banks front, New York Community Bancorp experienced a dramatic shift, initially dropping to an intraday low of -14.29%, but later rallying to close with a gain of +6.67%. This notable volatility began with the company's downgrade by Moody’s from Baa3 to Ba2. The subsequent recovery was fueled by a Bloomberg report indicating that the bank was considering selling some of its assets. The 10Y US treasuries rallied around the US open due to the regional bank concerns. However, that reversed later in the session, with the 10Y yield moderately up on the day (+2.1bps to 4.12%) despite a solid 10Y auction.

Last night in Asia, several key developments significantly influenced market dynamics. Notably, China exhibited signs of deflation, as January's consumer prices fell by -0.8% year-on-year, surpassing the expected -0.5% decline. This marks the sharpest decrease since the 2009 global financial crisis. Additionally, producer prices dropped by -2.5%, close to the -2.6% anticipated. In response, Asian equities posted mixed performance - CSI 300 was roughly flat, the Shanghai Comp up 0.71%, and the Hang Seng Index in Hong Kong experienced significant losses, declining by -1.22%.

Other news:

China Is Oversupplied With Commodities as Deflation Persists BBG

US Initial Jobless Claims Drop for the First Time in Three Weeks BBG

Ozempic Maker Novo Gets Calls From ‘Scared’ Food CEOs BBG

How Jack Dorsey’s Plan to Get Elon Musk to Save Twitter Went South BBG

Google releases ‘Gemini’ in new effort to cash in on generative AI FT

‘Meme-lord’ Litquidity reveals his true identity FT

Maersk warns oversupply to hit profits and plays down Red Sea boost RTRS

Arm shares soar as AI-fueled boom brightens growth prospects RTRS

Coach parent Tapestry raises 2024 profit forecast on China demand recovery RTRS

Investors Are Almost Always Wrong About the Fed WSJ

The Confusingly Strong Economy Told in Three Stories WSJ

A robust earnings season, along with anticipation of interest rate reductions from the Federal Reserve, has bolstered equity markets. This positive momentum has been primarily driven by large-cap technology and artificial intelligence-focused companies, leading to a somewhat concentrated market breadth. However, amidst this resilience, there is growing skepticism regarding the extent to which the Federal Reserve will actually implement rate cuts.

Hawkish Tone from Fed Speakers

Cleveland President Loretta Mester struck a cautious tone, saying she if the U.S. economy performs as she expects it could open the door to rate cuts, but she's not ready yet to offer any timing for easier policy amid ongoing inflation uncertainty. Further she mentioned that “It would be a mistake to move rates down too soon or too quickly without sufficient evidence that inflation was on a sustainable and timely path back to 2%”.

Minneapolis Fed President Kashkari noted that “there’s been very good news” on inflation though “we’re not all the way there yet”. He also noted that the current stance of monetary policy may not be as tight as we would have assumed given the low neutral rate environment that existed before the pandemic. It is possible that the policy stance that represents neutral has increased. This morning he said “Sitting here today, I would say, two or three cuts would seem to be appropriate for me right now,” during a CNBC “Squawk Box” interview. “But again, I don’t want to prejudge things, but that’s, that’s my gut, based on the data we have so far.”

Philadelphia Fed President Harker struck a more balanced tone, saying that the Fed’s approach “has put us on the path to a soft landing” although he did not comment on rate cut prospects.

In addition to the previously mentioned points, the ISM Services index exceeded expectations, registering at 53.4 compared to the anticipated 52.0. Notably, the prices paid component reached an 11-month peak at 64.0, surpassing the forecast of 56.7. This indicates that inflationary pressures may still be present. Further encouraging news came from the Federal Reserve's Senior Loan Officer Opinion Survey (SLOOS), which indicated a moderation in the recent significant tightening of credit conditions in the fourth quarter. The survey revealed that the tightening of credit standards for commercial and industrial loans was at its most gradual rate in the past seven quarters. While credit conditions are still stringent, the risks to economic activity implied by the SLOOS appear to be diminishing.

The above comments led to partial recovery from the sharp rates sell-off seen post-NFP jobs report and Powell’s 60-minute appearance. Currently, the yield on 2-year notes stands at 4.42%, which is around 20 basis points higher than Friday, but below the peak of 4.48% observed in the past 48 hours. Similarly, the yield on 10-year notes is at 4.10%, up by 20 basis points since Thursday, yet below the high print of 4.17% recorded on February 5th.

What happened at New York Community Bancorp (NYCB)?

• The regional bank has been in freefall since reporting a surprise fourth-quarter loss last week.

• Poor earnings were reported due to significant increases in provisions. The bank has significant exposure to CRE at ~45% of tangible assets but had one of the lowest CRE reserve coverage ratios at just 0.6% last quarter before the big reserve build.

• Management is not capable of managing the transition to a category IV status. Extending to poor communication on the outlook for 2024 during the earnings call

• Dividend cut by more than 70%

• The moves reignited concerns that some small and medium sized banks could be squeezed by declines in profitability and losses on real estate holdings.

• After the closing bell yesterday, Moody's downgraded New York Community Bancorp's long-term debt rating by two notches from Baa3 to Ba2 and into HY territory. It remains on watch negative. “The downgrade reflects Moody’s views that NYCB faces high governance risks from its transition with regards to the leadership of its second and third lines of defense, the risk and audit functions of the bank, at a pivotal time,” Moody’s wrote. “In Moody’s view, control functions with strong knowledge of a bank’s risks are key to a bank’s credit strength.” NYCB said the downgrade isn’t expected to have a “material impact on our contractual arrangements.”

• The bank is searching for a chief risk officer and chief audit executive and has managers serving on an interim basis in those positions, NYCB said in an overnight statement made hours after the Moody’s report. Former executives in those roles left the bank in the months before its disastrous earnings report last week, Bloomberg reported.

• New York Community Bank’s shares jumped slightly early Wednesday after it promoted its chairman to help stabilize the company’s operations. The bank made Alessandro DiNello executive chairman effective immediately, promoting him from nonexecutive chairman, to work with CEO Thomas Cangemi “to improve all aspects of the Bank’s operations,” according to a statement released at 7:45 am.

• For the year, the stock is down ~59%, so the situation remains precarious.

Other News:

US Commercial Real Estate Contagion Is Now Moving to Europe BBG

Fed’s Kashkari Sees Two to Three Rate Cuts as Appropriate in 2024 BBG

Target Weighs Paid Membership Program Akin to Amazon Prime BBG

China Replaces Top Markets Regulator as Xi Tries to End Rout BBG

Snap Reports Disappointing Revenue During Ad Slump; Shares Plunge BBG

NYCB Extends $4.5 Billion Stock Rout to Lowest Level Since 1997 BBG

Uber posts first full-year operating profit and boosts buyback hopes FT

McKinsey and BCG warn staff face jail if they reveal Saudi work FT

How the US became the world's biggest gas supplier NYT

Last year's most accurate forecaster sees another year of economic growth and job gains WSJ

Why Americans Are So Down on a Strong Economy WSJ

Eurozone governments rush to sell bonds to tap investor demand FT

Trump floats Chinese goods tariff exceeding 60% if elected BBG

China's $2tln stock rout leaves investors scarred FT

Apart from PMIs, the US investors would be closely watching the Fed Senior Loan Officer's survey (SLOOS) to see if bank lending is tightening further, though so far that has not translated into reduced activity as it has done in the past. Perhaps, excess savings or cash are still high enough in the economy that businesses and consumers don't need much access to bank lending.

On Friday, the Bureau of Labor Statistics (BLS) is scheduled to release its annual revisions to the seasonal factors affecting the Consumer Price Index (CPI). These revisions are crucial, as highlighted by both Waller before the FOMC blackout and Powell during the FOMC, for fine-tuning potential rate cuts. Notably, last year's revisions resulted in a decrease in inflation figures for the first half of the year and an increase in the second half, significantly altering the perceived momentum of inflation.

This morning, Chinese stocks experienced notable volatility. The small-cap CSI 1000 index initially plunged 8% but later recouped some losses. The Shanghai Composite also fell over 3.5% before nearing a break-even point. This market instability continued despite recent assurances from the Chinese securities regulator (CSRC) to maintain stability. Additionally, China's services activity growth slowed slightly in January, as evidenced by a marginal decline in the Caixin services PMI due to reduced new orders.

Highlights of Fed Chair Powell’s interview on CBS's 60 Minutes

• Powell reaffirmed comments from last week that the Fed might not cut interest rates until after March. He cautioned about acting prematurely, as recent positive trends might not accurately predict future inflation.

• Powell hinted at a potential rate cut around mid-year, although this was not explicitly stated in the aired interview.

• Powell also mentioned that the Fed's 2024 interest rate forecasts are unlikely to change significantly, with most participants anticipating rate reductions this year.

• The timing of potential rate cuts is politically sensitive, especially in an election year, with accusations that the Fed might influence the economy to benefit Democrats. Powell, however, firmly stated that the Fed's decisions are not politically driven.

• In light of the recent NYCB stock price drop, he didn’t sound too concerned and mentioned that commercial real estate was a manageable problem -"We looked at the larger banks' balance sheets, and it appears to be a manageable problem. There's some smaller and regional banks that have concentrated exposures in these areas that are challenged. And, you know, we're working with them."

What to Watch this Week

Economic data:

Feb. 5: Fed Senior Loan Officer's survey (SLOOS)

Feb. 5: S&P Global US Services PMI; ISM services index; Senior loan officer survey

Feb. 7: MBA mortgage applications; trade balance; consumer credit

Feb. 8: Initial jobless claims; wholesale trade sales and inventories

Feb. 9: BLS inflation revisions

Fed calendar:

Feb. 5: Atlanta Fed President Raphael Bostic

Feb. 6: Cleveland Fed President Loretta Mester; Minneapolis Fed President Neel Kashkari; Boston Fed President Susan Collins; Philadelphia Fed President Patrick Harker

Feb. 7: Federal Reserve Governor Adriana Kugler; Richmond Fed President Tom Barkin; Fed Governor Michelle Bowman; Collins

Feb. 8: Barkin

Feb. 9: Dallas Fed President Lorie Logan

Auction calendar:

Feb. 5: 13-, 26-week bills

Feb. 6: 42-day cash management bills; three-year notes

Feb. 7: 17-week bills; 10-year notes

Feb. 8: 4-, 8-week bills; 30-year bonds

Other news

Iran Used Santander, Lloyds Accounts to Evade Sanctions, FT Says BBG

Read the Full Transcript of Powell’s Interview With CBS’s ‘60 Minutes’ BBG

Senators Reach Deal on Ukraine Aid and US Border, But Hardline Republicans Still a Threat BBG

World Cup 2026 Final Goes to NYC in Victory Over Dallas, LA BBG

Why central banks are reluctant to declare victory over inflation FT

Magnificent Seven’s grip on markets slips as investors look past AI hype FT

Thank goodness we’ve reached peak MBA FT

Bank of Japan grows more confident about imminent exit from negative rates FT

New quality glitch to delay some Boeing 737 MAX deliveries RTRS

China's Jan services activity expands at slower pace - Caixin PMI RTRS

China's tumbling prices push some exporters to the brink RTRS

The Money and Drugs That Tie Elon Musk to Some Tesla Directors WSJ

New York and New Jersey Selected to Host 2026 World Cup Final WSJ

Invest in America, Live in Europe—a Mantra Some Just Can’t Shake WSJ

Why You Keep Getting Useless Alerts on Your Phone WSJ