Lots of Fed talk…

Thoughts of the Day

Despite initial attempts at a sell-off following Powell’s pushback on interest rate cut expectations, major The data calendar this week is relatively light and the next data point that the market will be watching out for is the US inflation data (Consumer Price Index) that will be released next Tuesday. Until then, the market will be reacting to the various comments and opinions of the US Federal Reserve officials scheduled to speak this week.

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Day Ahead

The RBA is expected to keep interest rates at 4.35% in its monetary policy meeting.

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What Happened Yesterday

Market Movements as of New York Close 5 Feb 24

Fedspeak:
Kashkari (2026 voter, known hawk):
“Higher neutral rate means that the Fed can take more time to assess upcoming data before beginning rate cuts with less risk to the recovery. Higher neutral rate means monetary policy may not be as tight as thought and noted that core inflation is making rapid progress towards the Fed’s target.”
(Kashkari remains one of the more hawkish official)

The Euro Area Producer Price Index showed that industrial producer prices within the Euro Area saw a -drop of 10.6% YoY in December 2023, down from -8.8% in November representing the steepest decrease in three months and slightly exceeding the anticipated decline of -10.5%. Market reaction to the data point was muted.

The US Treasury Yield curve inversion narrowed to 0.29% as the US 2-year bond yield rose +0.10% to 4.46% while 10-year yield increased +0.14% to 4.17%, mainly because of Kashkari hawkish comments. 

The US stock futures started out weak (early session lows: ES: -0.24%, NQ: -0.18%) in the opening hours of Asia due to the US strikes on Houthi targets. However, the market then slowly crept higher through the  rest of the Asian and London trading hours on Monday with the S&P 500 futures down just -0.06% when the New York session began.

The US stock market opened almost unchanged from Friday. It then started trading lower in the early New York session following Kashkari’s comments about higher neutral rates. However, the pessimism subsided and eventually markets started to erase some of the losses made. As a result, the S&P 500 fell -0.32% (high: -0.03%, low: -0.82%), the Dow Jones slipped -0.71% (high: -0.05%, low: -1.12%) while the Nasdaq dropped -0.17% (high: +0.07%, low: -0.98%). The recovery in stocks from the lows was led by Nvidia’s strong performance on the day. It rose +4.79% (and another 1.25% in after hours trading) after Goldman Sachs hiked its price target on the maker of chips for artificial intelligence from 625 to 800. 

Palantir (NYSE: PLTR) spiked +17.3% in aftermarket trading after it reported its “first profitable year” on Tuesday on strong demand for its AI offerings. Earnings: 8 cents as expected, Revenue: $608.4 million vs $602.4 million expected.

The crypto market continues to trade in a narrow range due to the lack of market drivers.
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Headlines & Market Impact

Mortgage rates jump back over 7% as stronger economic data rolls in

Notable Snippet: The average rate on the popular 30-year fixed mortgage crossed over 7% on Monday for the first time since December, hitting 7.04%, according to Mortgage News Daily.

It comes after the rate took the sharpest jump in more than a year Friday, after the January employment report came in much higher than expected. Rates then moved up even more Monday after a monthly manufacturing report came in high as well.

Mortgage rates have been on a wild ride since the summer, briefly crossing to a 20-year high of 8% in October. Rates then fell sharply, as investors saw more and more evidence that the Federal Reserve would end its latest phase of interest rate increases.

Mortgage rates do not follow the Fed directly, but they follow loosely the yield on the 10-year Treasury, which is heavily influenced by the central bank’s impression of the economy at any given time.

“The rapid increase in rates over the past two days is actually not too surprising given the fact that the market was widely seen as overly optimistic on the Fed rate cut outlook. The Fed has repeatedly pointed to economic data having the final say in that outlook and data has been shockingly unfriendly to rates as of Friday morning’s jobs report,” said Matthew Graham, chief operating officer at Mortgage News Daily.

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Tech execs are telling investors they have to spend money to make money on AI

Notable Snippet:  One theme investors heard repeatedly from top execs is that, when it comes to AI, they have to spend money to make money.

“We move from talking about AI to applying AI at scale,” Microsoft CEO Satya Nadella said on his company’s earnings call on Tuesday. “By infusing AI across every layer of our tech stack, we are winning new customers and helping drive new benefits and productivity gains.”

Last year marked the beginning of the generative AI boom, as companies raced to embed increasingly sophisticated chatbots and assistants across key products. Nvidia

 was the big moneymaker. Its graphics processing units, or GPUs, are at the heart of the large language models created by OpenAI, Alphabet, Meta and a growing crop of heavily funded startups all battling for a slice of the generative AI pie.

As 2024 gets rolling and executives outline their plans for ongoing investment in AI, they’re more clearly spelling out their strategies to investors. One key priority area, based on the latest earnings calls, is AI models-as-a-service, or large AI models that clients can use and customise according to their needs. Another is investing in AI “agents,” a term often used to describe tools ranging from chatbots to coding assistants and other productivity tools.

Overall, executives drove home the notion that AI is no longer just a toy or a concept for the research labs. It’s here for real.

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Oil market will face supply shortage by end of 2025, Occidental CEO says

Notable Snippet: The oil market will face a supply shortage by the end of 2025 as the world fails to replace current crude reserves fast enough, Occidental CEO Vicki Hollub told CNBC on Monday.

About 97% of the oil produced today was discovered in the 20th century, she said. The world has replaced less than 50% of the crude produced over the last decade, Hollub added.

“We’re in a situation now where in a couple of years’ time we’re going to be very short on supply,” she told CNBC’s Tyler Mathisen at the Smead Investor Oasis Conference in Phoenix.

For now, the market is oversupplied, which has held oil prices down despite the current conflict in the Middle East, Hollub said. The U.S., Brazil, Canada and Guyana have pumped record amounts of oil as demand slows amid a faltering economy in China.

But the supply and demand outlook will flip by the end of 2025, Hollub said.

“The market is out of balance right now, but again, this is a short-term demand issue,” Hollub said. “But it’s going to be a long-term supply issue,” she said.

OPEC is forecasting global oil demand will grow by 1.8 million barrels per day in 2025 on a solid economy in China, outstripping crude production growth of 1.3 million barrels per day outside the cartel. The forecast implies a supply deficit unless OPEC ditches current production cuts and boosts its own output.

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Phan Vee Leung
CIO & Founder, TrackRecord