Will Stock Markets Recover After NVDA Earnings and FOMC Minutes? "Not So Fast", says Ilya Spivak

Key Concepts

• Macroeconomic Environment: Persistent inflation, hawkish monetary policy, and slowing global growth.
• Energy-Inflation Nexus: The correlation between rising energy costs (crude oil, natural gas) and broader inflationary pressures.
• FOMC Minutes: The Federal Reserve’s shift toward a more hawkish stance, with discussions regarding the removal of easing biases.
• PMI (Purchasing Managers' Index): A key indicator of economic health where values above 50 signal growth and below 50 signal contraction.
• AI Sentiment: The market's reaction to Nvidia’s earnings as a potential "sentiment marker" for the broader tech rally.
• Stagflationary Risk: The concern that central banks may be forced to hike rates into an economy that is already showing signs of contraction.

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1. Market Overview and Price Action

The market is currently in a "wait-and-see" mode following Nvidia’s earnings and the release of the FOMC minutes. While there was a notable pop in the S&P 500, it failed to negate the downside momentum established on Friday.

• Energy Complex: Crude oil remains roughly 40% higher than pre-war levels. Natural gas is holding at former range resistance, suggesting the path of least resistance remains to the upside.
• Bonds and Yields: Bond prices saw a minor relief rally, but the long-term trend remains a "stair-step" decline in bond prices (higher yields) as inflation expectations remain elevated.
• Gold and Dollar: Gold is showing signs of a developing downtrend (lower highs and lower lows). The US Dollar is consolidating at the top of its range, poised for potential further gains if yields continue to rise.

2. The Inflationary Story

The speaker emphasizes that inflation is no longer confined to the energy sector; it is bleeding into core inflation and services.

• Cleveland Fed Inflation Now Model: Data suggests that actual inflation is outperforming the model, indicating that the model is understating the current inflationary pressure.
• Service Sector Spillover: Rising costs in warehousing, transportation, and wholesale margins for petroleum-based products are driving core inflation higher.
• Break-evens: Inflation expectations in the bond market continue to rise in lockstep with crude oil prices.

3. FOMC Minutes and Monetary Policy

The April FOMC minutes revealed a hawkish shift:

• Policy Bias: Many policymakers expressed a desire to remove the "easing bias" from official statements.
• Embedded Inflation: Participants voiced concerns that elevated energy prices and tariffs could cause inflation to become structurally embedded.
• Rate Cut Outlook: While some participants still see a path for rate cuts if the conflict resolves, the current data suggests that rate cuts are increasingly "off the menu." The market is now pricing in a better-than-even chance of a rate hike, potentially extending into next year.

4. Nvidia and AI Sentiment

Nvidia reported massive growth (EPS up 131% YoY, Revenue up 85% YoY), yet the market response was "nonplussed."

• The "Table Stakes" Argument: The speaker argues that these results were already priced in. Because the market did not rally significantly on this news, it suggests that the "exuberant AI headlines" may have run their course as a market catalyst, leaving the market to default back to macro-inflationary concerns.

5. Global Growth and PMI Data

The speaker highlights a dangerous divergence: central banks are looking to hike rates while economic growth is slowing.

• Eurozone Case Study: The ECB is expected to hike rates three times this year, despite the Eurozone facing a second consecutive quarter of economic contraction.
• US Growth Trend: US economic activity has been in a concerted decline since mid-2023. The "Composite PMI Output Price Index" is at its highest level since mid-2022, signaling that more inflation is on the horizon despite the cooling economy.

6. Strategic Positioning (Actionable Insights)

The speaker outlines a portfolio strategy based on the "higher interest rates" thesis:

• Short Positions: Gold, Australian Dollar, British Pound, Euro, and stock indices (via call selling in the Russell 2000 and put verticals in NASDAQ/S&P).
• Long Positions: Crude Oil (USO) and Natural Gas (UNG) via call verticals; Bitcoin (IBIT) via call vertical; IGV (software ETF) via call vertical.
• Bond Strategy: Puts on TLT, betting on higher interest rates and weakening bond prices.

Synthesis/Conclusion

The market is currently caught between a massive AI-driven tech boom and a harsh macroeconomic reality defined by sticky inflation and slowing growth. The speaker concludes that the "AI story" is losing its power to distract from macro fundamentals. With inflation spilling into services and central banks leaning hawkish despite weakening economic data, the risk of a "wrong kind of resolution"—where growth succumbs to inflation—is increasing. Investors should prepare for a environment where interest rates remain higher for longer, regardless of the specific timing of Fed rate hikes.