Jensen Huang's Cool Moment, Nvidia's Blackwell, Japan's End of an Era, U.S. Rates

It finally happened. 

While most of you slept, the Bank of Japan, in what has to now be considered an anticlimactic move, voted by a 7-to-2 margin to guide its overnight interest rate up to a range spanning from 0% to 0.1%. This makes the BOJ the last of the central banks to leave the realm of negative nominal interest rates. 

The BOJ had started to use negative rates as a policy tool back in 2016 to try to provoke the nation's banks to extend more credit in an attempt to generate economic activity. This is the BOJ's first rate increase since 2007. 

The yen's value actually dropped versus the U.S. dollar overnight as the BOJ's policy statement read "Given the current outlook for economic activity and prices, the bank anticipates that accommodative financial conditions will be maintained for the time being."

The BOJ made clear that it intends to continue with its policy of purchasing Y6T (about $40B) per month in Japanese sovereign debt (quantitative easing), but will discontinue its purchases of ETFs and REITs. To be sure, none of Japan's long-standing problems have been relieved, such as an aging and decreasing population, slow growth in consumption, and out-of-control national debt levels.

This would make sustaining an upward trajectory for short-term rates in Japan quite difficult. That said, Japan achieved a national year-over-year CPI that grew 2.0% in February and has remained above 2% since April 2022, apexing at 4.2% growth in January 2023, so some might say that this move comes a bit late. That is because Japan has struggled to maintain a positive reading for GDP. Q4 2023 GDP printed at quarter-over-quarter growth of just 0.1% earlier this month, which was below expectations, but effectively ended the nation's latest recession (two successive quarters of negative GDP growth), so this action was taken.

What Does It Mean to U.S. Investors?

So far, not really so much. Obviously, should one step lead to another, though there is no reason to believe that the BOJ will be aggressively hawkish anytime soon as they are still buying government bonds, then the Japanese yen would rise against the U.S. dollar. Additionally, the slope of the Japanese yield curve would inflate relative to the U.S. yield curve, which would accelerate should the FOMC move to cut rates anytime soon. 

The fact that Japan and Japanese accounts have been the largest investors in U.S. Treasuries for some time now is well known. There has been a carry trade between the two that has been worth it for Japanese investors. Even this morning, the U.S. 10-Year Note pays 4.33%, while its Japanese equivalent pays 0.73%, so the trade is still there, and it likely still makes sense for risk-averse Japanese accounts to participate at auction here in the U.S. That said, the next few steps on monetary policy both in the U.S. and in Japan will have to be watched for an erosion in the value of that trade, which would of course put increased upward pressure on U.S. federal borrowing and servicing costs. 

Outside of the U.S., this carry trade has existed, though to a lesser degree, between Japanese investors and U.K. sovereign debt as well as the sovereign debt of some EU nations with more elevated yield curve regimes.

On U.S. Rates

The yield for the U.S. 2-Year Note has run from roughly 4.2% on January 31 to 4.73% this morning. That's just a little more than six weeks ago. The U.S. 10-Year Note currently pays 4.33% after paying as little as 3.88% on February 1. 

The bond market appears to have figured out that with the overt rekindling of both consumer and producer-level U.S. inflation that the FOMC cannot move toward easier monetary policy anytime to the immediate front. The S&P 500 is up 6.3% since January ended, so I'm not so sure that everyone got the same memo.

What happens if the Fed changes its stance just slightly Wednesday afternoon? We already saw some protective put buying on Monday ahead of the event. Not a soul expects the Fed to take any kind of action on Wednesday or even in May for that matter. That said, what if the verbiage of the official statement is tweaked slightly to send a message that the FOMC is more open as a group to maintaining higher rates for longer? What if Fed Chair Powell in his press conference sends a message that the FOMC is as open to one more rate hike as they are to a rate cut this year?

Thoughts like these are not crazy. Not in the least. In fact, if the economy is as strong as we are told it is, with inflation somewhat reborn, jawboning about a potential rate hike would seem to make sense. Then again, if the economy is as weak as I (and now some others, I'm not alone on this anymore) suspect it is, then the Fed cannot go there. Despite the fact that the monetary base and money supply are still too large for the size of the economy.

What about the dot plot though? Two meetings ago (economic projections are made four times a year, there are eight policy meetings per year), consensus view across the membership of the FOMC was drawn down to 75 basis points worth of rate cuts in 2024. What if that view is brought down further? 

This morning, there is still, according to futures trading in Chicago, a 55% likelihood for a first rate cut on June 12. On Monday, that probability flirted with the 50/50 level and actually sunk below 50% briefly. Those markets at this early hour on Tuesday morning are still pricing in a 61% probability for 75 basis points worth of rate cuts this calendar year.

Dazed and Confused

Equity markets, at least on the surface, looked strong. Monday's rally to be honest, though, was quite narrow and shallow. 

The S&P 500 gained 0.63% for the session as the Nasdaq Composite popped for a gain of 0.82%. In each case, that gain ended a three-day losing streak. That said, the Philadelphia Semiconductor Index closed out the day essentially flat despite Nvidia's NVDA huge AI-infused clambake in San Jose. 

Indexes focused on corners of the market more reliant upon economic growth than others did not fare so well. The Dow Transports gave up 0.52%, posting a fourth consecutive red daily candle, while the small-cap Russell 2000 gave back 0.72% on the day and closed Monday in the red year to date.

Nine of the 11 S&P sector SPDR ETFs closed in the green on Monday led by Communication Services XLC at +2.05%. However, breadth was not decisive. Winners beat losers by just a smidge at the NYSE as losers beat winners by a 5 to 4 margin at the Nasdaq. 

Advancing volume took a 51.7% share of composite NYSE-listed trade and a 53.4% share of composite Nasdaq-listed trade. Obviously, coming off of a triple-witching expiration event on Friday, trading volumes on Monday were sharply lower.

Did You Know?

According to a survey done by the New York Fed, about one-third of respondents who intend to try to refinance their mortgages over the next year expect to be rejected, while 31.8% of those who intend to apply for an auto loan expect the same fate. 

These levels are decade highs for this survey.

Did You Know?

Those who took out adjustable-rate mortgages (ARMs) just ahead of the pandemic are about to start getting slapped around by a hike in their mortgage rates. Interest rates for ARMs are locked in for the first five years of the loan and then are adjusted accordingly. 

According to the Mortgage Bankers Association (which I read about at Bloomberg's website), ARM rates were close to 4% in March 2019. Five years later, these rates are trading around 6.4%. Ouch.

The Fonz

Nobody's cooler in 2024. Not Taylor Swift. Not your favorite ballplayer. Nobody.

Jensen Huang, CEO of Nvidia, took the stage at the SAP Center in San Jose, California on Monday afternoon. Packed house. A hushed excitement. 

"Accelerated computing has reached the tipping point." Huang told the audience that Taiwan Semiconductor TSM, Nvidia's foundry, is already going into production to increase the ability to manufacture what's next. "We're going to have to build even bigger GPUs. Hopper is fantastic, but we need bigger GPUs."

Huang then unveiled "Blackwell," which is Nvidia's latest GPU platform that will be much faster at running the large language models that underpin generative artificial intelligence. The Blackwell GPUs are to be made up of 208B transistors (yes, that's 208 billion) and run with 192GB of high-bandwidth memory. This new architecture will be available both as an accelerator and as a "super-chip." Blackwell will be more powerful and run faster than Hopper (Blackwell's predecessor that set the AI world on fire in 2023 and landed Nvidia as the nation's third most valuable company in terms of market cap.) with 2.5 times the 8-bit floating power.

Blackwell is expected to be deployed by the likes of Amazon AMZN, Microsoft MSFT, Alphabet GOOGL, Oracle ORCL and IBM IBM later this year for use in those firm's cloud services businesses as well as others. 

Quite simply, the coolest. Well, since the Fonz.

Note to Readers

The FOMC may be going into session today, but it's the Atlanta Fed that will likely have to revise its Q1 GDPNow model after February Housing Starts hit the tape. 

The model is currently at growth of 2.3% (q/q, SAAR), which is easily the most optimistic of the four regional Fed district branches that model GDP in anything close to real-time. The other three all do their model revisions on weekends.

Economics (All Times Eastern)

08:30 - Housing Starts (Feb): Expecting 1.432M, Last 1.331M SAAR.

08:30 - Building Permits (Feb): Expecting 1.5M, Last 1.489M SAAR.

08:55 - Redbook (Weekly): Last 3.0% y/y.

16:00 - Net Long-Term TIC Flows (Jan): Last $160.2B.

16:30 - API Oil Inventories (Weekly): Last -5.521M.

The Fed (All Times Eastern)

Fed Blackout Period.

Today's Earnings Highlights (Consensus EPS Expectations)

After the Close: ZTO (2.76)

At the time of publication, Guilfoyle was long NVDA, AMZN and MSFT equity.