Bracing for the Fed
FOMC preview and NVDA GTC event takeaways
With BoJ and NVDA’ GTC events out of the way, market is looking forward to the FOMC tomorrow. While it is widely expected that the Fed will keep overnight rates unchanged, the odds of June cuts have dropped to 58% after recent prints of hot inflation data. The total number of cuts for the year priced by the market is 72bps (2.9 cuts) compared to 102bps (4.1 cuts) on March 8th.
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:
No change to rates or monetary policy at this meeting
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.
With all the debate about higher r*, could we see longer-run dots increase from 2.5%?
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.”
The last Summary of Economic Projections from the December 2023 meeting showed:
Median unemployment rate expected at 4.1% by end of 2024.
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.
Median GDP projection was at 1.4%, given Fed’s concerns on growth most recently, we don’t expect major changes here.
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.
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.
