Jensen, the Man Who Can Make Wall Street Do a U-Turn
As indexes were falling into the red, Nvidia's Huang said exactly what portfolio managers, investors and traders wanted to hear. Let's unpack what just happened.
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What was that? U.S. equities sold off in response to consumer inflation data for August and sold off rather sharply. At least from the opening bell and over the hour or so that followed, it felt as if a severe selloff might be in the works.
Then, almost as if coordinated algorithmically, a U-turn.
The entire aura around our beloved financial marketplace shifted. For a third consecutive trading session, U.S. equities sold off out of the gate into mid-morning, and then rallied from that point over several hours into the closing bell. On Wednesday both the morning selloff and the ensuing rally were more pronounced than either had been on Monday or Tuesday.
The Nasdaq Composite had been down as much as 1.4% for the session, only to close up 2.17%. That's not normal. The S&P 500 had been down 1.6% at the day's low and managed to close up 1.07% on Wednesday. This one will knock your socks off: The Philadelphia Semiconductor Index was down 1.4% at 10:52 a.m. ET on Wednesday and then steamrolled everything in its path on its way to close up a stunning 4.9%. Rock 'n' roll.
So how does a slightly warm to the touch monthly print for consume price index provoke a selloff that turns into an aggressive rally? That's not hard to figure out. They call him "The Fonz" and he spoke on Wednesday from the Goldman Sachs Communacopia & Technology Conference. Of course, I write of Nvidia NVDA CEO Jensen Huang. Huang said exactly what portfolio managers, investors and traders wanted to hear on Wednesday and they reacted with fervor. Is it really that simple? In the era of electronic trade? You bet it is. All you need is a little love, or a little hate and voila! You have momentum and momentum breeds overshoot.
August CPI
August CPI, released about 24 hours ago by the Bureau of Labor Statistics, crossed the tape at month-over-month growth of 0.2% at the headline and 0.3% at the core. The headline print was in line with expectations and in line with July. The core print landed above expectations for growth of 0.2% and reflected an uptick from July's 0.2% growth.
On a year-over-year basis, the headline and core prints hit the tape at growth of 2.5% and 3.2% respectively. That headline print was down from July's 2.9% and a bit cooler than the consensus view for growth of 2.6%. This was largely due to sharply reduced August prices for gasoline, fuel oil, electricity, and piped gas (basically everything energy-related). The 3.2% core print was both in line with July and in line with expectations.
The slightly warm core month-over-month print is what startled Wall Street early on Wednesday ahead of Huang's address. It wasn't just the core print, though; it was what was inside, as well. Prices for shelter, which we know is dated material, was supposed to be in decline by now, and it had seemed to be. Shelter was up 0.5% month over month in August, after having increased 0.4% in July and 0.2% in June. Shelter prices, which are sticky, are accelerating instead of cooling and are now up 5.2% year over year.
Within the shelter space, owners' equivalent rent was up 0.5% month over month and 5.4% year over year, while rent of primary residence was up 0.4% month over month and an even 5% year over year. This is supportive of services inflation, outside of energy that just is not cooling off. Services, outside of energy, were up 0.4% in August and are up 4.9% over 12 months. Taking that space one step further, insurance prices are up 16.5% year over year. Almost all of the progress made on inflation has been made on the goods side. Core goods have actually been deflating. The Fed has been unable to slow demand for necessary services through tighter monetary policy. Does looser policy reawaken inflation in places it has already cooled? I have warned for many months that consumer-level inflation would accelerate again late 2024 into early 2025.
Huang Soothes
Speaking from San Francisco, Huang said, "Today's computing is not 'build a chip' and people can buy your chips, put it in a computer. That's really kind of 1990s. The way that computers are built today, if you look at our new Blackwell system, we design seven different types of chips to create the system. Blackwell is one of them."
There. He mentioned Blackwell. Why is Blackwell important? This architecture is the platform upon which Nvidia's next generation AI-capable chips are built. It was unveiled earlier this year, but there have been delays in production that have caused concern on Wall Street. Blackwell is key to Nvidia maintaining its lead in the AI space over key competitors such as Advanced Micro Devices AMD and key towards keeping large clients within the Nvidia ecosystem.
On that note, Huang added: "We are ramping Blackwell. And it's in full production. We'll ship in Q4 and scale it, start scaling in Q4 and into next year. The demand is so great, and everybody wants to be first."
A sigh of relief was heard up and down Wall Street on those remarks. Investors and traders bought Nvidia stock, they bought the semiconductor space more broadly, and all tech more broadly than that. In fact, these comments turned the entire trajectory for the day for U.S. equities.
Additionally, and unrelated, unnamed sources at the Saudi AI Summit, were reported by Semafor to have said that the U.S. government was close to permitting high end chips designed by Nvidia to be exported to Saudi Arabia as that nation is working to meet US national security requirements.
Breadth ... Better Not Get Too Close
End of day breadth across U.S. equities was less than minty fresh. Some might point to that as a sign that there was not so much conviction in Wednesday's rally. I might even do that myself. That said, it must be understood that Wednesday was a tale of two sessions. There was a sharp selloff followed by an even sharper rally, so it would be very difficult to end up with very convincing looking breadth. Personally, I think that there was even a rally at all, was a rather impressive feat.
Six of the 11 S&P sector SPDR exchange-traded funds managed to close out Wednesday in the green, obviously led by Technology XLK. Tech gained 3.41% on the day, finishing well ahead of the Discretionaries XLY that finished in second place at +1.0%. Staples XLP and Energy XLE led the losers, both surrendering 0.93% for the session.
Winners beat losers by 4 to 3 at the New York Stock Exchange and by 7 to 6 at the Nasdaq. Advancing volume took a 60.1% share of composite NYSE-listed trade, but aggregate NYSE-listed trade was down small on a day over day basis. Advancing volume took a more commanding 71.2% share of composite Nasdaq-listed trade, and this is impressive. Aggregate Nasdaq-listed trading volume was up 22.7% on a day over day basis. That puts some oomph behind the tech rally.
Keep In Mind This Inflation Fact
The fact that despite consumer-level inflation appears to be bottoming, Fed Funds futures markets trading in Chicago, while pricing in a smaller rate cut next week, seem to be pricing in a very hard (not soft at all) landing next year. Markets are currently pricing in an 85% probability for a quarter-point rate cut next year and a 55% likelihood for three-quarter point total rate cuts by Nov. 7. Then, the Fed, according to these markets, gets really aggressive. By January, a target for the Fed Funds Rate of 3.75% to 4% (down 1.5 percentage points from today) has been priced in. by mid-year, June 2025, a target of 3% to 3.25% (down two-and-a-quarter percentage points from today) is now priced in.
Equity markets and forward-looking estimates for corporate earnings are not pricing any of this in. These markets still think 2025 is "game on," but these markets and Treasury markets to be honest, are pricing in something awful in less than a year's time. There is no way the Fed cuts the Fed Funds rate two-and-a-quarter percentage points in nine months, unless the economy is in crisis.
On That 'Note'...
The U.S. Treasury Department had no problem selling $39 billion worth of new Ten-Year Notes on Wednesday. While the secondary market for US Treasuries displayed some weakness on Wednesday, the 1 p.m. ET auction announcement showed a high yield of 3.648%, which stopped through the "when issued" by 1.4 basis points at the time.
Bid to cover was up big from August for this series and the internals were excellent. Indirect Bidders (foreign accounts) took down a robust 76.1% of the issuance. That was their largest slice of this pie since early 2023. Direct (domestic) Bidders went home with 13.7% of the auction, leaving Dealers with just 10.2% of the pie. That was the smallest percentage that Dealers had been stuck with for this series since August 2023.
At least one concern has been answered for the short-term. The weaker U.S. Dollar, which has been getting softer since July, is not yet driving foreign accounts away from U.S. sovereign debt. Should weaker dollar valuations persist, the removal of favorable carry trade conditions will drive foreign accounts out of this market. The U.S. Dollar Index, though, it should be noted, is up nicely over the past two weeks.
News: Palantir, Albemarle
- On Tuesday, Barron's reported that Sarge fave Palantir Technologies' PLTR Chair Peter Thiel had filed to sell up to $1 billion worth of Palantir stock. The actual disclosure had been made in August via Theil's investment, Rivendell 7 LLC. There have been no sales made as of yet based off of this announcement through Rule 10b5-1. Theil's vehicle adopted a plan in May that would allow a large sale by year's end 2025. Week to date, PLTR is up 14.9%.
- Former Sarge name Albemarle ALB popped for a gain of 13.58% on Wednesday as news broke that China's CTL, which is the world's largest maker of electric vehicle batteries, is considering suspending some lithium mining operations and then adjust production accordingly. ALB is still down 37.8% year to date and down 73.3% from the cycle high in late 2022.
Economics (All Times Eastern)
08:30 a.m. - Initial Jobless Claims (Weekly): Expecting 231K, Last 227K.
08:30 - Continuing Claims (Weekly): Last 1.838B.
08:30 - PPI (July): Expecting 0.2% m/m, Last 0.1% m/m.
08:30 - Core PPI (July): Expecting 0.2% m/m, Last 0.0% m/m.
08:30 - PPI (July): Expecting 2.1% y/y, Last 2.2% y/y.
08:30 - Core PPI (July): Expecting 2.4% y/y, Last 2.3% y/y.
10:30 - Natural Gas Inventories (Weekly): Last +13B cf.
1:00 p.m. - Thirty Year Bond Auction: Last $22B.
1:00 - Federal Budget Statement (Aug): Last $-244B.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: KR (0.91), SIG (1.21)
After the Close: ADBE (4.53), RH (1.83)
At the time of publication, Guilfoyle was long NVDA, AMD and PLTR equity.
