The Evidence is Piling Up

Thoughts of the Day

As we have been saying for some time, it’s likely that we have seen the last interest rate hike of this cycle from the US FED. Pricing in the interest rate futures market indicates that investors believe the probability of an interest rate cut as early as the March 2024 meeting is now above 40%. More clarity will emerge tomorrow with the release of the US inflation data (PCE Price Index)

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Day Ahead

The US GDP Growth Rate is expected to reflect a +5% Quarter-on-Quarter growth in Q3 compared to +2.1% in Q2.

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What Happened Yesterday

Market Movements as of New York Close 28 Nov 23
  • Bowman (current voter, known hawk): “I remain willing to support raising the federal funds rate at a future meeting should the incoming data indicate that progress on inflation has stalled or is insufficient to bring inflation down to 2 percent in a timely way.”
    Waller (current voter, known hawk): “If inflation constantly declines, there is no reason to insist on really high rates. I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2 percent. “
    Goolsbee (current voter, known dove): “Once you believe that you are on the path to get inflation to target, then the amount of restrictiveness that you need to apply needs to be less.”

(Waller seems to be becoming more dovish.)

  • The Australian Monthly CPI Indicator showed that prices rose +4.9% (vs +5.2% expected) in October, down from +5.6% in September. It was the first decline in annual inflation and the slowest pace since July. The AUD spiked +0.27% briefly (from 0.6651 to 0.6669) against the USD following the release as this positive inflation data reduces the risk of a hard landing.
  • The RBNZ kept interest rates at 5.5% in its Interest Rate Decision for the 4th consecutive time as expected. The RBNZ noted that inflation remains too high, and the Committee remains wary of ongoing inflationary pressures. As such there may be possibilities of further rate hikes should inflationary pressures be stronger than anticipated. The NZD appreciated more than +0.7% against the USD (from 0.6149 to 0.62 level) following the policy decision.
  • The US Treasury Yield curve inversion narrowed to 0.39% as the US 2-year bond yield and the US 10-year bond yield fell -0.09 and -0.05%% to 4.73% and 4.34% respectively.
  • The US stock futures traded in a subdued manner through the Asian trading session with stock futures trading sideways. It then started to falter lower through the London trading session with the S&P 500 futures falling -0.14% on the day before the New York session began.
  • The US stock market opened lower from Monday. It then started to trade higher following dovish comments from Federal Reserve officials Waller and Goolsbee. However, some profit-taking set in as stocks eased off the highs but still closed positive on the day. Consequently, the S&P 500 closed +0.10% higher (high: +0.39%, low: -0.22%), the Dow Jones rose +0.24% (high: +0.52%, low: -0.07%) while the Nasdaq rose +0.30% lower (high: +0.44%, low: -0.26%).
  • The crypto market traded higher on the back of stronger risk sentiment and a weaker USD. Bitcoin is up +1.52% while Ether is up +1.02%.
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Headlines & Market Impact

Amazon announces new AI chip as it deepens Nvidia relationship

Notable Snippet: Amazon’s AWS cloud unit has announced new chips for customers to build and run artificial intelligence applications on, as well as plans to offer access to Nvidia’s latest chips.

Amazon Web Services is trying to stand out as a cloud provider with a variety of cost-effective options. It won’t just sell cheap Amazon-branded products, though. Just as in its online retail marketplace, Amazon’s cloud will feature top-of-the-line products from other vendors, including highly sought after GPUs from top AI chipmaker Nvidia.

Demand for Nvidia GPUs has skyrocketed since startup OpenAI released its ChatGPT chatbot last year, wowing people with its abilities to summarise information and compose human-like text. It led to a shortage of Nvidia’s chips as companies raced to incorporate similar generative AI technologies into their products.

Amazon’s dual-pronged approach of both building its own chips and letting customers access Nvidia’s latest chips might help it against its top cloud computing competitor, Microsoft. Earlier this month, Microsoft took a similar approach by revealing its inaugural AI chip, the Maia 100, and also saying the Azure cloud will have Nvidia H200 GPUs.

The new Nvidia GPU is an upgrade from the H100, the chip OpenAI used to train its most advanced large language model, GPT-4. Big companies, startups and government agencies are all vying for a limited supply of the chips, meaning there’s high demand for renting them out from cloud providers like Amazon as well. Nvidia has said the H200 will generate output nearly twice as fast as the H100.

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Bill Ackman Bets Fed Will Cut Interest Rates as Soon as First Quarter

Notable Snippet: The Pershing Square Capital Management founder said such a move could happen as soon as the first quarter. Traders are fully pricing in a rate cut in June, with the chance of a cut happening in May priced at about 80%, according to swaps market data.

The Fed began aggressively raising rates in March 2022, leading to the fastest pace of rate increases in 40 years. The central bank has yet to cut rates even as US inflation has broadly slowed this year.

“What’s happening is the real rate of interest, which is what impacts the economy, keeps increasing as inflation declines,” Ackman said in an upcoming episode of The David Rubenstein Show: Peer-to-Peer Conversations.

Ackman said that if the Fed keeps rates in the roughly 5.5% range when inflation trends below 3%, “that’s a very high real rate of interest.”

The firm has made a number of macro bets over the years. Last month, Ackman moved the market when he tweeted that the firm had covered its short bet on US Treasuries.

Ackman told Rubenstein he’s not convinced the US economy is headed for a so-called soft landing, a scenario where the Fed raises interest rates without triggering a recession.

“I think there’s a real risk of a hard landing if the Fed doesn’t start cutting rates pretty soon,” said Ackman, noting that he’s seen evidence of a weakening economy.

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Charlie Munger’s greatest bits of investing advice from over the years

Notable Snippet: Unlike the investing philosophy in most textbooks, Munger didn’t believe in diversification, or mixing a wide variety of investments within a portfolio, to lower risk. In fact, the Berkshire vice chairman called it “insane” to teach that one has to diversify when investing in common stocks.

Much like Buffett’s theory about the “circle of competence,” Munger believed that savvy investors should focus on areas within their expertise and strength in order to avoid mistakes. “We’re not so smart, but we kind of know where the edge of our smartness is … That is a very important part of practical intelligence,” Munger said.

The investing sage believed that in investing, it pays to wait. Munger thought that the key to stock-picking success is sometimes doing nothing for years and pulling the trigger with “aggression” when it’s time.

The conglomerate was often questioned about its huge cash war chest and the lack of deals, when interest rates were near zero. Munger often defended Berkshire’s inaction as he always saw the virtue of sitting on the sidelines to wait for a good opportunity.

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Phan Vee Leung
CIO & Founder, TrackRecord