Fed hawks are getting louder

Good news were bad news yesterday and they even wiped out the optimism that Nvidia initially created around AI with the announcement of new products. When Jensen Huang took stage at the opening of the CES this week, he didn’t only show off the company’s new products like the new $3000 personal AI supercomputer and its new gaming chip created with the same design than the now-famous Blackwell chip, but he also spit out a lot of new partnerships with advanced warehouses and autonomous driving carmakers around the world to improve their devices with their powerful AI chips - among them Toyota which gained yesterday and today in Tokyo, Uber that saw its share price jump more than 3% at the open, Accenture that saw its own share price jump more than 3% as well compared to the closing level of the day before, and Aurora which saw its share price jump up to 72%. Most of the gains were given back during the session, the selloff being put on the back of a broad-based market selloff. Nvidia hit a fresh record high before diving more than 6%. Some said that the new projects demanded long time to bring in concrete revenues, and many preferred taking their profit in their pockets and walk away.

But beyond the price action in Nvidia and growing number of related stocks, the new year begins strongly on how the AI technologies will affect – and improve – the existing tools for many technology companies beyond the Magnificent 7 and that – to me – is almost more exciting than how much more money Nvidia could make. In all cases, it looks like the AI talk is NOT ready to be over just yet. On the contrary, we are only getting started.

Zooming out

News were much less exciting on the economic data front than it has been on the AI front. The US released a set of higher-than-expected ISM data, suggesting that non-manufacturing activity was better than expected in December – in contradiction to the S&P’s PMI data released a day before. But what really dampened the market mood was that prices paid by companies unexpectedly - and meaningfully - jumped to the highest levels since 2023. Separately, JOLTS data hinted at an unexpected jump in job openings in November to above 8 mio jobs openings. The better-than-expected US data fuelled the hawkish Federal Reserve (Fed) expectations, pushed the US yields higher and kicked the expectation of the next Fed cut further down the road. A May cut is now a coin flip, and many believe that the Fed may want to wait until June to announce its next rate cut.

In the FX

The US dollar rebounded against most majors as the latest US data fuelled the Fed hawks. Due today, the ADP report is expected to print a relatively soft number of new private job additions last month – a consensus of analyst estimates on Bloomberg expects the US economy to have added just below 140K new private jobs in December down from 146K added a month before. A soft ADP print should easily scale back the hawkish Fed expectations – that may have gone a bit ahead of themselves, but a stronger-than-expected figure will certainly worsen the bond selloff.

Note that, the hawkish Fed expectations is not necessarily the root cause of the US bond selloff; the fear that the US government spending under Trump will explode is a bigger issue. Since the Fed started cutting the interest rates in September, the US yields only kept climbing. The US 10-year yield was near 3.60-3.65% into the Fed’s first rate cut in September and has risen more than a full percentage point since then... which is – yes – a bit disquieting. Also, the yield curve steepened a bit too fast. And the rapidly rising yields despite the Fed calling the end of its post-pandemic tightening cycle now sent the gap between the S&P500 earnings yield and the BBB bond yield to a deepest negative level since 2008. In plain English, the BBB-rated corporate bonds today pay less return than the riskier equity investments. And that’s an anomaly: it means that either the market is in a bubble or the credit risk is rising meaningfully. Presently, we could suspect both. The S&P500 fell more than 1% yesterday, while Nasdaq dived nearly 1.80%. The Dow Jones retreated 0.42%, mid cap stocks lost 0.61% and small caps retreated 0.74%.

In Europe, the CPI reading went better than I expected. The latest CPI update from the Eurozone confirmed the rising price pressures in the December print, yet the number came in line with expectations as softer-than-expected figures in Italy and France compensated for the jump in German prices. The retreat in nat gas prices also improved the dovish ECB expectations on Tuesday and kept the upside in the EURUSD capped into the 1.0434 level. The pair tested the peak of the day before but failed to clear it as the combination of more dovish European Central Bank (ECB) expectations and more hawkish Fed expectations sent the pair below the 1.04 level.

Across the Channel, the UK’s 30-year gilt yield advanced to the highest level since 1998. Yes you are reading that right, the 30-year gilt yield hit the highest level since 1998 fuelling the expectation that the country will need more tax raises to finance its debt... Such a move would mean a bigger pain before any gain on the government’s spending plans. And that’s weighing on Cable right now, along with a broadly stronger US dollar. The pound remains bid against the euro, however, on expectation that the ECB will deploy a softer monetary policy than the Bank of England (BoE). And the latter – the dovish ECB expectations – remains well supportive of the Stoxx 600 which cleared the 100 and 200-DMA yesterday. The MACD indicator turned positive for the first time since 18th of December, hinting that momentum traders could continue to push the European stock valuations higher.