Can Nvidia Fix the Interest Rate Problem?
Buckle up, Nvidia earnings and the Jackson Hole Economic meeting hit the market this week.
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We have a lower open indicated for Monday with the Nasdaq 100 (QQQ) trading about 0.6% lower. That follows a week where the market rolled over as seasonality began to be felt, and comes ahead of two large events. Nvidia (NVDA) reports Wednesday after the close and Kevin Warsh delivers his first major policy speech as Fed Chair on Friday at Jackson Hole.
The market is struggling with the interest rate issue, and that combined with negative seasonality is likely to keep things very choppy.
The Rate Problem Did Not Get Solved
Yields surged Monday and Tuesday last week, with the 30-year briefly hitting a level last seen in 2007. They came back down Wednesday when Treasury Secretary Scott Bessent announced that starting next month, Treasury will accelerate its buyback of longer-dated bonds and issue shorter-term debt instead.
That relief lasted about a day. The 10-year finished the week at 4.74%, four basis points higher on Friday alone. The Treasury buyback program is a variation of something that the Fed has used in the past when it bought long-term bonds and sold short-term debt to flatten the yield curve. The big difference is that this time it is the Treasury rather than the Fed that is taking the action and that raises questions about what happens when two government agencies are working the same yield curve from different directions.
The Wall Street Journal is providing a bullish explanation for the surge in yields. It argues that an uptick in expectations for future economic growth, caused by technology companies willing to bid up interest rates as they borrow to invest in artificial intelligence, is causing higher rates.
That is not without support and it fits with Friday’s PMI showing business activity at its fastest pace in more than four years. If yields are rising because growth is accelerating, that is a very different situation from yields rising because of inflation fear.
I am not fully persuaded but it explains why the market is not under more pressure. Rising yields driven by AI borrowing still raise the cost of data center construction. The hyperscalers are still competing for capital regardless of what is motivating the borrowing. But it is a legitimate counterargument and anyone thinking the market is going to collapse needs to understand the point.
Nvidia Is Not Going to Fix This
Once again, expectations for Nvidia earnings are enormous. Analysts project record sales of $92 billion, up from a forecast of $78 billion at the start of this year, and the company has beaten estimates for 14 consecutive quarters. To beat this target Nvidia will need better than 95% annual earnings growth.
Even if the report is exceptional, the likelihood that it triggers a sustained uptrend is very low. We saw this before in July. Microsoft (MSFT) posted the largest one-day gain in market capitalization by any company ever and the market still spent the following weeks under pressure. Alphabet (GOOGL) and Tesla (TSLA) results drove an $890 billion wipeout and contributed to the unwind of Situational Awareness. A single report, even from the largest company in the market, does not resolve a rate problem or reverse a seasonal pattern.
What a good Nvidia report will do is produce volatility, and that is useful in creating dislocations in price in the broader market. That is where I am looking for trade opportunities.
One issue about Nvidia that is going to continue to attract attention is that the company teamed up with six of Wall Street’s biggest firms on a $500 billion AI financing plan, pledging to secure lending to customers that cannot afford its chips otherwise. It also took a stake in a company that arranges power for data centers and struck a $6 billion deal with a startup developing an open-weight model.
Nvidia is increasingly financing its own demand, and that is a different business than selling chips. That circular financing is at the heart of the bearish arguments about the AI trade from folks such as Michael Burry.
The Week Ahead
Treasury Secretary Bessent holds a press conference Monday on plans to pressure Iran with what he called the toughest sanctions in history. That will impact the oil story and the situation will remain very messy and uncertain.
Wednesday brings the PCE price index, the Fed’s preferred inflation measure, along with durable goods and the second estimate of second-quarter GDP. Warsh speaks Friday at 10 a.m., and it remains to be seen whether he follows through on withholding forward guidance or decides he needs to address rising Treasury yields and the inflation fight directly.
Friday also brings the annual jobs revisions from the Bureau of Labor Statistics. The last release showed a steep drop and prompted President Trump to call the statistics fake and fire the agency’s chief. Given that July payrolls already declined by 23,000 with downward revisions of another 103,000 to the prior two months, that release could matter more than usual.
Game Plan
My approach is stronger defense, higher cash levels, and greater selectivity. The setups I want are starting to develop but I am in no hurry.
September is historically the weakest month of the year and we are not there yet. Between the rate uncertainty, the seasonal pattern, and two binary events this week, I have no motivation to risk substantial capital on the outcome of these events.
At the time of publication, Rev Shark had no positions in any securities mentioned.
