Rates and chips

Yesterday’s US inflation data was the last possible barrier to the much-expected extra 25bp cut from the Federal Reserve (Fed) next week, and the release went well. The figures came spot on expectations. Headline inflation inched slightly higher from 2.6% to 2.7% while core inflation remained sticky at 3.3%. If you ask me, with Trump’s pro-growth policies and tariff threats threatening to give a positive jolt to inflation in the coming months, a core inflation figure that’s insistently above the 3% doesn’t necessarily call for an extra 25bp cut, but this is most probably what the Fed will do. The Fed will most probably cut one more time this year with activity on Fed funds futures assessing nearly 100% probability to it, and take a breather in January.

As such, the US 2-year yield is now around 4.16% - having held ground above the 4.10% mark, certainly on the thinking that the Fed should slow down rate cuts next year. The 10-year yield is advancing toward 4.30% level, up from 4.13% at the lowest of December, and the major indices rally with joy. The S&P500 closed a few points below an ATH yesterday, while Nasdaq 100 jumped 1.82% to an ATH. But it’s not only the Fed. It’s also tech related news. Google for example jumped nearly 5.5% to a record high on news that the company made a ‘major development’ in quantum computing using its Willow quantum chip that helped the company’s quantum computer to solve a problem in just five minutes instead of septillion years by using a supercomputer. The company didn’t give away any use case for such a powerful computing, and quantum computers are far from mass adoption, but the latest news gave hope to investors that the Willow chip could give them an advantage in their AI race. Before I move forward, quantum stocks gained yesterday on the news, Defiance Quantum ETF jumped to an ATH before giving back gains. The price moves in quantum will likely be volatile at this stage given that commercialization is not due in the foreseeable future, but chasing interesting entry levels is interesting.

Coming back to my chip story, Broadcom – that’s due to announce earnings today - flirted with ATH yesterday on news that they are developing an AI chip with Apple – who is also interested in Amazon’s Trainium chips, mind you. Of course, the news that the Big Tech companies are now building their own chips to train their own AI models could be bad news for Nvidia which made around 50% of its last quarter revenue from the Big Tech companies. But happily, TSMC said that its sales rose 34% in November – hinting that AI demand remains strong  despite the growing worries of slower spending. Nvidia gained more than 3% yesterday, while AMD rebounded 1.90% from the lowest level since summer.

In Europe, the news are much less future-oriented and exciting, to be honest. But the Stoxx 600 is better bid on hope that the European Central Bank (ECB) will step up its support to the economy. In this context, the ECB is expected to deliver another 25bp cut at today’s meeting. Some have been expecting the ECB to do more than that. Since Donald Trump won the US presidential election, the increased risks on European economies due to tariff threats brought some investors and analysts to bet for a 50bp cut as an immediate reaction. Others, like me, think that the ECB would better deliver a cautious 25bp cut today AND shift its focus from inflation to growth, as doing so will open the way for a series of rate cuts instead of a jumbo cut that the zone doesn’t need in a hurry. As I wrote earlier this week, the euro could avoid an aggressive selloff provided that the dovishness from the ECB has been already priced in – starting from Trump’s victory day. The EURUSD fell from around 1.10 down to 1.0340 over that period. As such, I wouldn’t be surprised to see the euro bulls resist to a dovish announcement – if Lagarde could convince investors that they are taking measures to boost growth and that the measures could work.

Of course, there is no telling that a growth-supportive monetary policy will lead to growth – especially given that the member states are expected to tighten their fiscal policies to control their budget deficit, and that’s not necessarily growth supportive– yes I am looking at you, France and Germany. But a sufficiently supportive ECB stance and a contained euro depreciation could back a further rise in European stock valuations and help them to extend this year’s rally. Of course, the valuations on index level hide the ugly economic fundamentals of the Eurozone companies, as only a handful of the companies contributed to the gains at the index level. Those companies include SAP that benefits from the AI rally, Siemens, and Novo Nordisk. But the carmakers and luxury-stuff makers for example struggle big time. Therefore, stock picking in the European equity complex is a good idea.

Other than the ECB, the BoC cut by 50bp yesterday, and the SNB could opt for 50bp to counter the franc’s appreciation.