Equites were nervously lower yesterday ahead of NVDA’s earnings that is released tomorrow and September’ s jobs report posted on Thursday that could question the direction of monetary policy.
Also released this week are, Home Depot’s, Target’s and Walmart’s earnings, results that can offer some insight as to how the government shutdown has impacted the economy.
As noted the other day, the Atlanta Fed is now estimating a third quarter growth rate of 4.0%, the result of massive AI spending.
Some have stated this furious growth in one segment is only benefiting the relatively few that are employed or impacted by that segment. One report differentiated today’s environment as the age of “Spenders vs. Earners.”
In the AI race there are handful of giant companies spending vast sums on chips and infrastructure. This spending goes to a differing group of “earners” like energy, industrials, utilities and materials firms.
And then there is another huge spender…the US government who is borrowing $2 trillion every year, representing about 7% of GDP,. This furious borrowing has persisted during the past several years and is projected to continue at this pace for the intermediate future.
Interest expense on this debt is now about $1.1-$1.2 trillion, amount that is consuming more and more of the budget. Five years ago, interest expense was around $350 billion.
The President is attempting to coerce the Fed into lowering interest rates partially because of this massive debt that must be serviced.
Thus far the 150 basis points of interest rates have not really produced all that much in terms of lower rates on mortgages and other consumer debt.
A strong argument can be made that if the Fed continues to lower short term rates in today’s inflationary environment, long term interest rates could increase dramatically. Based on the prevailing inflationary rate, the 10-year should be 150-200 bps higher than current levels but for whatever reason, they are not. If the Fed does lower rates, will the long-term relationships between short term and long-term debt return?
Writing it differently, the Fed is between a giant rock and a very hard place. Inflation is around 3% to 3.5%, with the potential to rise further. Unemployment is still relatively low at 4.3%. The economy is doing well.
The regional Fed presidents are listening to their constituents stating that inflation is a major problem in their districts. Employment concerns are also rising. The Fed is under political pressure. [Every decision is political. It is just more pronounced today]
One can make the observation that there is no good path to take but it is instead choosing the “least bad” direction to pursue.
Commenting about the velocity of change, A Bloomberg headline read “Bitcoin Humbles Wall Street Faithful After $600 billion Plunge” The Newswire states the “market has retreated fast and hard with no clear trigger,” wiping out over $600 billion in about forty days with “many” who are anxious and attempting to find an explanation.
And then there is AMZN who just rose $15 billion in its corporate bond offering, “upping” the deal size from $12 billion because of demand. AMZN stated that there was about $80 billion of demand. Wow!
What will happen today?
Last night the foreign markets were down. London was down 1.38%, Paris down 1.43% and Frankfurt down 1.47%. China was Japan down 3.22% and Hang Seng down 1.72%.
Futures are about 0.5% lower on monetary, economic and earnings angst. Bitcoin’s rout is continuing as the cyber currency is almost 29% lower than it was 40 days ago. Home Depot cuts forecast on weak demand for big ticket items, partially the result of overall weakness in the housing market. The 10-year is up 7/32 to yield 4.11%.
