Free Fallin' China, Ruble Rubble, Bank Ratings Warning, Nvidia and the Semis

China's National Bureau of Statistics released their monthly batch of macroeconomic data for July early on Tuesday morning (Monday night in New York). The results largely fell short of expectations, again, forcing the People's Bank of China to take several steps toward an easier stance on monetary policy.

For the month of July, Retail Sales in China printed up 2.5% year over year, down from growth of 3.1% in June, and for the fourth consecutive month, fell short of expectations. Industrial Production for July in China hit the tape at an annual growth rate of 3.7%, which also fell short of estimates, as July Fixed Asset Investment missed the mark as well. In a surprise move, as the official unemployment rate across China inched up to 5.3% in July from 5.2% for June, Beijing made the odd decision to stop reporting the nation's youth unemployment rate.

The jobless rate for 16 through 24 year olds in China had increased steadily for six straight months, reaching a record 21.3% in June. Economists had projected that this unemployment rate would pop in July as college and high school graduates join the labor force. The number was not reported along with the rest of the July data as Chinese officials said that they would no longer itemize that information. What a solution. If the numbers really, really stink, they just no longer exist.

Don't forget that earlier this month we had already seen data that showed double-digit percentage declines for both Chinese exports and imports as that economy slid into outright deflation. New loans for July in China printed at less than half of expectations and at their weakest monthly level since 2009. In addition, private wealth manager Zhongrong and real estate developer Country Garden Holdings have both missed recent payments.

The People's Bank of China surprised by responding to the weakening data by reducing a range of interest rates. Beijing's central bank lowered the interest rate on a facility that funnels one-year loans to banks from 2.65% to 2.5%, while also reducing the interest rate on seven-day reverse repo operations from 1.9% to 1.8%. The PBOC also made additional rate cuts to much of its portfolio of policy rates, trimming their overnight, one-week, and one-month rates from its standing lending facility meant to provide emergency funding to commercial banks that must put up high-quality collateral against the loans.

Panic at the Disco

On Monday, the Russian ruble plunged to almost 102 to the U.S. dollar. Yes, that made the ruble worth less than a penny in the U.S. Russian President Vladimir Putin's economic adviser Maxim Oreshkin had authored an op-ed at the Tass state-owned news agency that cast blame for the 7%+ inflation Russians are experiencing and the weak ruble on "loose" monetary policy.

Come Tuesday morning, the Bank of Russia (Russia's central bank) called an emergency meeting and increased that nation's benchmark rate from 8.5% to 12%. This did arrest the falling ruble and put a bid under the troubled currency.

This morning, I have seen the U.S. dollar trading at around 98 Russian rubles. The Bank of Russia apparently intends to cut this rate incrementally going forward one the ruble has been stabilized. Yeaahh..

Index Futures and Bank Ratings

Asian and European markets (ex-Italy) mostly sold off on Tuesday morning, largely in response to the weakening data in China as well as a hot print for June wage growth in the U.K. despite rising unemployment in that nation. The U.K.'s July data for both CPI and PPI are due tomorrow. That should have more of an impact than this morning's numbers. Regardless, this morning's data do have economists wondering if the Bank of England's MPC (Monetary Policy Committee) will have to take the Official Bank Rate (currently at 5.25%) to 6% or greater.

These developments had already placed pressure on U.S. equity index futures overnight into the zero-dark hours on Tuesday morning. Then, another shoe would drop.

This shoe would be domestic in nature. CNBC is reporting that analyst Chris Wolfe at Fitch Ratings is warning that should the U.S. banking industry face an overall downgrade from an AA rating to A+ then Fitch would have to reevaluate its ratings on more than 70 U.S. banks, including the big kids. Readers will recall that just last week, Moody's downgraded 10 small to mid-sized U.S. banks while warning that another 17 banks, including some larger institutions, could face potential downgrades.

What could trigger an industrywide downgrade that could impact even the nation's largest banks? Something out of their control such as higher short-term interest rates for longer, which perpetuates the inverted yield curve, pressuring net interest margin and forcing persistent mark-to-market losses on existing bond portfolios.

On That Note...

On Monday, Goldman Sachs (GS) economists led by David Mericle and Jan Hatzius joined what had become the consensus view and indicated that they now see the FOMC potentially cutting the Fed Funds Rate by the second quarter of 2024. Goldman also points out that rates may have to stay higher should inflation show signs of rekindling. Then another hike would be possible. All things being equal, though, Goldman does not see the Fed continuing to tighten interest-rate policy any further this cycle.

Goldman's thinking is now in line with what Fed Funds Futures trading in Chicago are currently pricing in. That market currently sees the Fed Funds Rate where it is, at 5.25% to 5.5%, as the terminal rate. These markets are also pricing in a 39% chance for a November 1 rate hike and a 72% chance for a May 1 rate cut.

Of course, the quantitative tightening program, which does put upward pressure on interest rates as central bank demand for Treasury securities withers and the money supply is drawn down, will continue (and should continue) for a considerable period.

Meanwhile, Back at the (Semiconductor) Ranch...

I was at the Ponderosa, rapping to the beat

(The Rappin' Duke, Shawn Brown, 1984)

On Monday, Morgan Stanley five-star (rated by TipRanks) analyst Joseph Moore named Nvidia (NVDA) a "Top Pick" and said that now is a good time for investors to get into the name, following its recent decline. At almost the same time, UBS five-star (rated by TipRanks) analyst Timothy Arcuri increased his price target for NVDA to $540 from $475.

This put a bid under Nvidia in particular (+7.09%) and the semiconductor space more broadly. Then news broke that Saudi Arabia and the United Arab Emirates had reportedly purchased thousands of GPUs from Nvidia. The Financial Times reported that Saudi Arabia alone had purchased more than 3,000 Nvidia H100 chips as the UAE had also secured thousands of chips itself as that nation develops its own large language generative AI model, known as "Falcon."

Not only does this put (my opinion here, just thinking) Nvidia in a tough place in terms of supplying demand from across the globe, even if the Biden administration policies put the pinch on sales to Chinese interests, this bodes well for Nvidia competitors as well, such as Advanced Micro Devices (AMD) which is said to be just months away from launching their own high-end AI capable chips.

For the day, the Philadelphia Semiconductor Index ramped 2.87% as the Dow Jones US Semiconductor Index popped for an even more impressive 4.22% gain. Broadening the industry move behind Nvidia were Micron (MU) and AMD. Those two stocks were up 6.07% and 4.1% respectively.

In Actuality

The Monday rally in U.S. equities was rather weak, especially if one looks around what drove the semis higher. While the S&P 500 did gain 0.58% and the Nasdaq Composite 1.05%, the fact is that Treasury yields moved higher (and still are this morning) and breadth was not very minty fresh.

Losers beat winners at both the NYSE and the Nasdaq by roughly 3 to 2. Advancing volume took just a 41.3% share of composite NYSE-listed trade, but a somewhat better 51.8% share of composite Nasdaq-listed trade. The interesting thing here is that aggregate trading volume increased on a day-over-day basis for NYSE-domiciled names, where advancing volume had taken only a minority share.

Where advancing volume had taken a majority share of trade, among Nasdaq listings, the fact is that trading volume decreased some 7.9% day over day. What that tells us is that the professional money did not get behind what transpired on Monday or if they did, their flow of capital was siloed toward tech. The mid-major to major averages may have moved higher on Monday, but there was no broad rally on Wall Street.

The Macro

This morning's releases of data points such as July Retail Sales and Industrial Production will impact Q3 GDP projections. The Atlanta Fed's GDPNow model has the quarter off to a fast start at growth of 4.1% q/q SAAR. That model will be revised within a couple of hours of those releases.

Remember, business inventories are a key GDP ingredient, but this morning's number is for June, not part of the third quarter. That said, it will impact any revisions to the second quarter, which printed preliminarily at growth of 2.4%.

Economics (All Times Eastern)

08:30 - Retail Sales (July):Expecting 0.4% m/m, Last 0.2% m/m.

08:30 - Core Retail Sales (July): Expecting 0.4% m/m, Last 0.2% m/m.

08:30 - Import Prices (July):Expecting 0.2% m/m, Last -0.2% m/m.

08:30 - Export Prices (July): Expecting 0.2% m/m, Last -0.9% m/m.

08:30 - Empire State Manufacturing Index (Aug):Expecting -0.5% m/m, Last 1.1.

08:55 - Redbook (Weekly):Last 0.3% y/y.

10:00 - NAHB Housing Market Index (Aug):Expecting 56, Last 56.

10:00 - Business Inventories (Jun): Expecting 0.2% m/m,Last 0.2% m/m.

16:00 - Net Long-Term TIC Flows (Jun): Last $25.8B.

16:30 - API Oil Inventories (Weekly):Last +4.067M.

The Fed (All Times Eastern)

11:00 - Speaker: Minneapolis Fed Pres. Neel Kashkari.

Today's Earnings Highlights (Consensus EPS Expectations)

Before the Open: (HD) (4.44), (ONON) (0.12)

After the Close: (CAVA) (-0.03), (HRB) (1.88)

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