Welcome to the Fed Show, Quantum Goes to Space, AI's Power Problem, and More
Let's check the countdown to 2 p.m., Doug Kass on artificial intelligence, China's chip war and a NASA deal.
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Welcome to the Show
I've been waiting here to be your guide
So come
Reveal the secrets that you keep inside
Step up!
No one leaves until the night is done
The amplifier starts to hum
The carnival has just begun
- Cuomo, Stanley (KISS), 1998 from "Psycho Circus"
Tick, Tick, Tick...
The clock on the wall. A silent sentry. Witness to some of my greatest professional triumphs as well as some of my truly less than great moments. Tick, tick, tick. Eternity's friend, indifferent partner. Do you wait? Or do you merely mark time, unaware of the environment, the challenges, those who've gone before, and those who rise still? Tick, tick, tick ... for this day is Fed Day for the final time of the year. Another year down. How many left? Not for you and I to know. Fed Day. Tick, tick, tick....
They wonder. Investors, traders, economists, even the public. They wonder and wait for 2 p.m. ET. It's at that time that the Federal Reserve Bank's Federal Open Market Committee will release the latest policy statement as it does eight times a year. Along with that statement, this afternoon, the committee will release its updated, quarterly economic projections to include it famous, or should I say infamous, dot plot.
It is then that you and I will get to look over the group's median expectations for economic growth, unemployment, inflation and the Fed Funds Rate. That last item, the only item among those releases that is 100% of the FOMC's own doing. The rest might be referred to as inputs that the Fed can impact but ultimately provide for the environment in which policy decisions resulting in headline short-term borrowing costs and the elasticity of the monetary base must be made. Tick, tick, tick....
Tuesday's Macro
At first glance, November retail sales looked strong. At the headline, retail sales were up 0.7% from October (unadjusted for inflation), while October was revised to +0.5% (up from +0.4%) from September. The truth is, however, that once motor vehicles and parts are omitted from the equation, "core" retail sales were only up 0.2% from October, which was well below the core growth of 0.4% that economists had been looking for.
Aside from autos, there was strength in internet sales and in the "fun" index, which includes sporting goods, hobbies, music, and books. When the fun index is strong, it either indicates that consumers are feeling able to spend money on non-essentials or that it is the holiday season, and these are gifts. This year, the November data did include Black Friday but not Cyber Monday. It may have been the season for fun, but apparently not for department stores, clothing, personal care products or gasoline.
A short while later, November industrial production printed in the hole at -0.1% month over month. This was the third consecutive month and the fourth month in five that industrial production contracted from the month prior. Manufacturing production was again the culprit as capacity utilization dropped from 77% to 76.8%. This past June, capacity utilization ran as high as 78.2% as the optimism that America's recession across the manufacturing space might be coming to a close. Apparently, that was not the case.
In response to the weak Tuesday macro, the Atlanta Fed revised its GDPNow model for fourth-quarter gross domestic product down to growth of 3.1% (q/q, SAAR) from 3.3% as the inputs for real gross private domestic investment and real government expenditures were both tweaked lower.
As for This Afternoon...
Fed Funds futures markets trading in Chicago are currently pricing in a 95% probability for a quarter-percentage point rate cut later today. Then, these markets expect a pause in January, another quarter-percentage point rate cut in March and then a lengthy pause with maybe one more quarter-percentage point rate cut after that for all of 2025.
What will likely matter more to markets this afternoon, than the all but certain rate cut, will be Fed Chair Jerome Powell's press conference that kicks off at 2:30 p.m. ET, which will be a half hour after the release of the statement and the economic projections. How Powell answers the more intelligent questions posed by a usually somewhat inane financial media and his overall demeanor as he addresses the renewed acceleration of consumer-level inflation in late 2024 and its implications for policy in 2025, will matter more than anything else.
Marketplace
Equity markets sold off a bit on Tuesday ahead of the FOMC dog and pony show later today. Markets were not awful at the headline-level as the S&P 500 gave up 0.39% and the Nasdaq Composite surrendered 0.32%. That said, all of the small to midcap indexes gave up more than 1% as did the Dow Transports, the Philly Semiconductors and the KBW Banks. Very interestingly, the Dow Jones industrial average closed 0.61% lower, marking a now nine-day losing streak.
What's remarkable is that this is the longest losing streak for the Dow industrials since 1978. Year of the Yanks. Roger Staubach was probably considered to be the greatest QB in NFL history. The Montreal Canadiens were in the middle of one of their most dominant dynasties, but there were two major hockey leagues. Been a while.
Though that's not before I started trading on a retail level, it is prior to my career on Wall Street. Heck, that goes so far back, that the Dow industrials would have been considered one of the majors, and the Nasdaq Composite might not be. Oh, and we would never talk about NYSE-listed trading volume without mentioning AMEX-listed trading volume. Long, long time ago.
Hockey Trivia
While the Montreal Canadiens won the 1978 Stanley Cup over the Boston Bruins, and ruled over the NHL, who won the WHA's 1978 Avco Cup?
Anyone Else Notice Quantum Moves?
That Sarge name Quantum Computing QUBT ran 51.5% on Tuesday after running 65% on Monday? Turns out that QUBT won a contract with NASA to use Dirac-3, which is the company's quantum optimization machine, to support NASA's advanced imaging and data processing demands. D-Wave Quantum (QBTS), Rigetti Computing RGTI and IonQ IONQ all followed QUBT into the green on Tuesday.
Geo-Political Arm Wrestling
On Tuesday, news broke around midday that China's antitrust regulator, the State Administration for Market Regulation, according to a report in "The Information" might be likely to review more technology deals that received "conditional approval" now that the 2020 Nvidia NVDA / Mellanox take-over has come under investigation. What becomes more likely would be that China's State Council and the Ministry of Foreign Affairs could make use of these probes to push for tighter export controls.
Almost on cue, within a few hours, news broke here in the U.S. that the Biden administration may be preparing to initiate a trade investigation into the Chinese semiconductor industry's push to reduce reliance on U.S. technology. Ironically, the Biden administration has restricted the sale of high-end U.S.-designed semiconductor technology to Chinese purchasers on national security grounds. Any new restrictions resulting from such a probe could impact older or less elite chips meant for use in medical devices, autos, smartphones and yes, weapons. All this with one month left before the coming transition of power in the U.S.
Doug Kass on AI Chips
According to a news story in The Financial Times this morning, which used estimates provided by Omdia, Microsoft MSFT has acquired twice as many AI-capable chips from industry leader Nvidia as have any of the firm's closest competitors. The report claims that Microsoft, the largest investor in OpenAI, has purchased roughly 485,000 Hopper chips from Nvidia this year, with Meta Platforms META, Nvidia's second largest U.S. customer, purchasing about 224,000. Amazon AMZN and Alphabet GOOGL have been Nvidia's third and fourth largest U.S. customers.
Meta Platforms, Amazon and Alphabet are all known to have deployed between 1.3 million and 1.5 million of their own chips apiece as a means toward controlling their reliance on Nvidia. Microsoft had seriously lagged behind these other companies in making use of chips it designed itself and thus had relied more heavily upon Nvidia.
But in a recent podcast interview with Brad Gerstner and Bill Gurley, Microsoft CEO Satya Nadella implied that the firm was not "chip supply constrained" but instead needed more power. In fact, in reference to past AI-chip purchases, Nadella said, "That is a one-time thing and now it's catching up."
Our own Doug Kass has been all over this story, and is quoted at MarketWatch this morning saying, “Apparently, they all got caught off guard in the beginning; nobody wanted to be left behind; they had the money and piled in with zero caution with no regard to how much they spent, and what they spent it on. These were also big projects, that are now largely completed.”
Obviously, as Doug has inferred, this is not the greatest of news for Nvidia.
Hockey Trivia Answer
In 1978, the Winnipeg Jets, starring Bobby Hull, Anders Hedberg and Ulf Nilsson swept the Avco Cup finals in four straight over the New England Whalers who themselves had Gordie Howe and his two sons, Mark & Marty on the ice.
Economics (All Times Eastern)
07:00 - MBA 30 Year Mortgage Rate (Weekly): Last 6.67%.
07:00 - MBA Mortgage Applications (Weekly): Last 6.4% w/w.
08:30 - Housing Starts (Nov): Expecting 1.345M, Last 1.311M SAAR.
08:30 - Building Permits (Nov): Expecting 1.43M, Last 1.419M SAAR.
10:30 - Oil Inventories (Weekly): Last -1.425MM.
10:30 - Gasoline Stocks (Weekly): Last +5.086M.
The Fed (All Times Eastern)
14:00 - FOMC Policy Decision.
14:00 - FOMC Economic Projections.
14:30 - FOMC Press Conference.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: BIRK (.26), GIS (1.22), JBL (1.88), TTC (.95)
After the Close: LEN (4.15), MU (1.77)
At the time of publication, Guilfoyle was long QUBT, QBTS, NVDA, MSFT, AMZN equity.
