Can Nvidia Save the Stock Market as Fed Rate Cut Hopes Unravel?

Key Concepts

• Market Sentiment: The overall attitude of investors towards a particular security or the market as a whole.
• Risk-On/Risk-Off: A market dynamic where investors are either willing to take on more risk (risk-on) or are seeking safety and avoiding risk (risk-off).
• FOMC Minutes: Transcripts of meetings held by the Federal Open Market Committee (FOMC) of the Federal Reserve, which provide insights into monetary policy discussions.
• Monetary Policy: Actions undertaken by a central bank to manipulate the money supply and credit conditions to stimulate or restrain economic activity.
• Fiscal Policy: Government actions related to spending and taxation to influence the economy.
• Basis Points (bps): A unit of measure used in finance to describe the change in value of financial instruments. One basis point is equal to 0.01% or 1/100th of a percent.
• EPS (Earnings Per Share): A measure of a company's profitability that indicates how much profit is allocated to each outstanding share of common stock.
• Revenue: The total amount of income generated by the sale of goods or services related to the company's primary operations.
• PMI (Purchasing Managers' Index): An economic indicator that provides information about the economic health of the manufacturing and services sectors.
• NFP (Non-Farm Payrolls): A monthly report released by the U.S. Bureau of Labor Statistics that measures the number of jobs added or lost in the economy, excluding farm workers, private household employees, and non-profit organization employees.
• Put Vertical: An options trading strategy that involves selling and buying put options with different strike prices but the same expiration date, used to profit from a decline in an asset's price.

Market Performance and Sentiment Analysis

The market is currently questioning what can save it from the ongoing selling pressure that began around October 29th. Today's market performance showed a tepid rise in stocks, with the S&P up 0.38% and the NASDAQ up over 0.6%. This uptick is attributed to a cautious "risk-on" mood, indicating a slight waning of the aggressive "risk-off" sentiment seen earlier in the week and the previous week.

Key Observations:

• Stocks: Modest rebound, but week-to-date performance remains negative (S&P and NASDAQ down almost 1.5%).
• Yields: Slight uptick, disconnected from immediate policy questions and reflecting the risk-on mood.
• Gold: Idling with a slight correction higher. It's no longer seen as a direct foil for the dollar or yields but as a speculative asset with its own narrative, distinct from stocks. This reflects a post-COVID, deglobalizing world where multiple, uncorrelated speculative narratives can coexist.
• Dollar: Up across the board, particularly after the FOMC minutes. It has strengthened against the Euro (up 0.5%) and Yen (up almost 1%).
• Yen: Weakened significantly due to dovish comments from Japan's new Prime Minister, Takayichi Sanay, who is a protégé of former PM Abe. Her administration plans a large spending package backed by low interest rates, suggesting the Bank of Japan (BOJ) will be restrained from raising rates. This rhetoric has been weighing on the Yen since July.
• Bitcoin: Continues its meltdown, down 3.52% today and 5.7% the previous week, indicating eroding risk appetite, especially in high-beta assets. This is seen as a clearer reflection of retail sentiment cracking, as professional sentiment has been negative for a while.

Impact of Economic Data and Fed Policy Expectations

The market's uncertainty is deeply tied to Federal Reserve policy expectations. A significant factor contributing to today's market movement was the cancellation of the October jobs report by the Bureau of Labor Statistics. This means the market will not receive October jobs data before the Fed's December 10th meeting (rescheduled to December 16th).

Key Points on Data and Fed Policy:

• Delayed Clarity: The delay in jobs data means neither the market nor the Fed will have crucial clarity ahead of the policy decision.
• Fed Policy Expectations: Going into today, December rate cut probabilities were hovering around 50/50. The data delay is interpreted as "more uncertainty for longer," suggesting the Fed might hold steady.
• FOMC Minutes Analysis:
  • Most officials see rate cuts over time as likely, indicating an overall dovish bias.
  • Several officials suggested a December cut could be appropriate.
  • However, many others felt rates should remain unchanged for the rest of the year, implying a consensus to hold rates steady in October.
• Jerome Powell's Stance (October 29th): Powell highlighted strongly differing views on December action, characterizing September and October cuts as "risk management" and not indicative of future policy. He emphasized data dependency and the Fed's potential to act if markets show significant distress (e.g., bond market screaming, credit spreads widening).
• Lack of Market Distress: Since October 29th, there hasn't been significant market distress to warrant Fed intervention.
• Government Shutdown Impact: The end of the government shutdown and the return of statisticians have resulted in less data than anticipated.
• Powell's Analogy: "What do you do if you're driving in the fog? You slow down." This reflects the Fed's cautious approach due to data uncertainty.
• Inflation Concerns: Most officials warned that additional rate cuts could risk embedding higher inflation.
• AI Expectations: Several officials warned of a possible sharp, disorderly drop in stock prices if AI-related expectations are suddenly reassessed.
• Fed Staff Outlook: Fed staff have slightly upgraded their GDP outlook through 2028, diminishing expectations for rate cuts.
• Current December Rate Cut Probabilities: Approximately 34% for a cut, 66% for a hold.

Nvidia Earnings and Market Reaction

Nvidia's earnings report after the close provided a slight lift to sentiment.

• Nvidia's Performance: Reported a 3% beat on both EPS and revenue for the third quarter, within their usual surprise range (4-10% since Q1 2024). EPS was $1.30 against expectations of $1.25.
• Market Impact: This positive result led to a lift in Nvidia shares, NASDAQ futures, and Bitcoin after hours.
• Sustainability Question: The key question is whether this positive sentiment will hold beyond the initial reaction, as the market has shrugged off good news since October 29th, with positive effects typically fading after 24-48 hours.

Upcoming Economic Indicators and Their Potential Impact

Several upcoming economic indicators will provide further insight into the market and Fed's direction.

• Belated September US Jobs Report (Tomorrow):
  • Expectation: 50,000 jobs added, 4.3% jobless rate.
  • Impact: While dated, it will serve as a sentiment barometer. A weak number could suggest a weak October, influencing Fed cut expectations. If very soft, markets might extrapolate a December cut due to labor market weakness being a Fed focus. However, its actionable impact on the Fed is unclear.
  • Potential Shift in Fed Expectations: A soft NFP could shift December rate cut probabilities from 33/66 to 60/40 or 70/30 in favor of a cut, but this level of expectation was already seen last week, suggesting limited sentiment boost.
• S&P Global PMI Numbers (Friday):
  • Indicator: A timelier measure of growth, not dependent on government shutdowns.
  • Expectation: Slight slowdown in the composite PMI number (move from 54.6 to 53.8).
  • Interpretation: A reading above 50 indicates growth, below 50 contraction. A move to 53.8 still signifies growth, but at a slower rate.
  • Historical Context: US composite PMI has shown growth rebounding after the tariff shock earlier in the year, reaching multi-year highs.
  • Fed Perspective: This data is not a recipe for aggressive Fed easing.

Market Expectations for 2024 and Fed-Market Divergence

Market expectations for 2024 contrast sharply with the Fed's own projections.

• Market Expectations: Almost fully priced-in expectations for three rate cuts in 2024, totaling 72 basis points.
• Fed's Forecast: Projects only one cut, with rates moving from 3.6% to 3.4%.
• Divergence: The market is significantly more dovish than the Fed's outlook.
• Potential for Disappointment: If the Fed does not ease as quickly as the market anticipates, the current disappointment could worsen.
• December Projections: The updated Summary of Economic Projections in December might further highlight this divergence, especially if strong PMI data emerges.

Historical Market Movements and Dollar Strength

• October 29th Fed Meeting: This date marked a top in the S&P 500, coinciding with Powell's comments. Since then, expectations for the rest of 2023 have unwound, but the market is holding onto cuts for 2024.
• Dollar Strength: Despite the start of a potential rate cut cycle, the dollar has strengthened. This is attributed to:
  • Priced-In Cuts: Much of the expected easing was already priced in.
  • Risk Aversion: The dollar is reclaiming its role as a haven asset amidst relentless market selloffs.

Portfolio Positioning and Trades

The speaker outlines their current portfolio positioning:

• Gold: Slightly long, looking for a bounce if the market extrapolates further rate cuts, which would require gold to revert to a dollar/yield-driven asset rather than sentiment-driven.
• Major Currencies: Short most major currencies. Previously flirted with long Euro and Pound, but quickly exited those positions. Currently short Pound, Euro, Aussie (since early week), and Yen (since July).
• Dollar: Very much long, with a one-sided exposure.
• Risk Assets: Short risk.
  • Bitcoin: Continues to sink, holding put verticals on Bitcoin (IBIT down 3.74% today) as they have performed well.
  • IWM (Russell 2000): Shorted this week, expecting further declines.
  • S&P 500 (SPY): Short since the October 29th Fed meeting, holding put verticals.
• Bonds: Long the long end of the bonds, as they are not responding readily to Fed policy expectations. This is attributed to risk aversion and the expectation of future rate cuts shifting deeper along the curve.
• Crude Oil: Short, but the position is near break-even and moving slowly. The bias remains down, with the price closing just under $71 today.
• Long-Term Exposures:
  • MSOS (Cannabis ETF): Long calls expiring at the end of next year, contingent on cannabis reform in midterms.
  • EWZ (Brazil ETF): Long calls expiring at year-end and early next year. This position has been working for months and will be rolled if it continues to perform.

The show "Macro Money" airs Monday through Thursday after "Overtime." The speaker also contributes to tasty.com and is active on former Twitter and Blue Sky.