The Fed is very close to cutting

Thoughts of the Day

The message from the US Federal Reserve Chair Powell yesterday was that the Fed will not shy away from cutting interest rates even if the US Presidential election is just around the corner. When asked if the bar to cutting interest rates has been cleared, he replied, “I do have some confidence of that, but I am not ready to say that yet”. 

Strangely, when asked, he did say so. Given that he’s quite clear that the current situation is such that it is as risky to cut too early as it is to cut too late, if we get another downside surprise in inflation, we will see them become more willing to say that the confidence to cut has been attained. 

As such, the Consumer Price Index data to be released later today will drive market sentiment today. If we see a benign inflation number, US stocks will break to all-time highs, yet again.

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Goldman Sachs Calls BS on the AI Bubble

My main concern is that the substantial cost to develop and run AI technology means that AI applications must solve extremely complex and important problems for enterprises to earn an appropriate return on investment (ROI). We estimate that the AI infrastructure buildout will cost over $1tn in the next several years alone, which includes spending on data centres, utilities, and applications. So, the crucial question is: What $1tn problem will AI solve? Replacing low-wage jobs with tremendously costly technology is basically the polar opposite of the prior technology transitions I’ve witnessed in my thirty years of closely following the tech industry.

Many people attempt to compare AI today to the early days of the internet. But even in its infancy, the internet was a low-cost technology solution that enabled e-commerce to replace costly incumbent solutions. Amazon could sell books at a lower cost than Barnes & Noble because it didn’t have to maintain costly brick-and-mortar locations. Fast forward three decades, and Web 2.0 is still providing cheaper solutions that are disrupting more expensive solutions, such as Uber displacing limousine services. While the question of whether AI technology will ever deliver on the promise many people are excited about today is certainly debatable, the less debatable point is that AI technology is exceptionally expensive, and to justify those costs, the technology must be able to solve complex problems, which it isn’t designed to do.”

  • Jim Covello, Goldman’s Global Head of Equity Research

An interesting piece noting the cost of running AI. While the costs are indeed higher, there will still be specific use cases for AI and other use cases where the time costs outweighs the capital cost of using AI.

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Day Ahead

The US Consumer Price Index is expected to show that prices rose +3.1% Year-on-Year in June, lower than +3.3% in May. The core rate is expected to remain at +3.4%.

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What Happened Yesterday

Market Movements as of New York Close 10 Jul 24
  • In his testimony about the Semi-Annual Monetary Policy Report before the Senate Banking Committee, Fed Chair Powell noted the Fed has maintained the federal-funds rate at 5.25% to 5.5% since July 2023, a level Powell considers above the U.S. neutral rate. He emphasised the possibility of achieving full price stability while keeping the unemployment rate low and noted that the Fed does not need to wait for inflation to hit its 2% annual target before considering lowering interest rates, as doing so could risk causing a recession.
  • The US stock market opened higher from Tuesday’s close. It then climbed through the New York session as investors became more convinced that the Fed Chair Powell is inching ever closer to an interest rate cut. Hence, the S&P 500 climbed +1.02% (high: +1.05%, low: +0.17%), the Dow Jones increased +1.09% (high: +1.13%, low: -0.09%) while Nasdaq popped +1.09% (high: +1.16%, low: +0.13%). The S&P 500 and Nasdaq closed at all time highs once again.
  • The crypto market traded within a narrow range with Bitcoin down -0.44% and Ether up +1.21%.
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Headlines & Market Impact

Powell says Fed will cut rates when ready, regardless of political calendar

Notable Snippet: Federal Reserve Chair Jerome Powell said on Wednesday the U.S. central bank will make interest rate decisions “when and as” they are needed, pushing back on a suggestion that a September rate cut could be seen as a political act ahead of the fall presidential election.

“Our undertaking is to make decisions when and as they need to be made, based on the data, the incoming data, the evolving outlook and the balance of risks, and not in consideration of other factors, and that would include political factors,” Powell said in a hearing before the House Financial Services Committee. “We have a long history of doing that, including during election years…Anything we do will be very well grounded. It’s just not appropriate for us to get into the business of thinking about election cycles at all, one way or the other.”

“I do have some confidence of that,” Powell said when asked directly if he felt the bar to cutting interest rates had been cleared, but “I am not ready to say that yet.” Recent data, however, has been encouraging, Powell told lawmakers, and he emphasised that risks to the job market now stand on equal footing with the risks of high inflation – with the Fed intent on meeting both its price stability and full employment goals.

“There is a path to getting back to full price stability while keeping the unemployment rate low,” Powell said. “We’re on it. We’re very focused on staying on that path.”

From ongoing growth to a 4.1% unemployment rate and falling inflation, Powell said the U.S. was enjoying “good numbers.”

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US needs stronger defences against China’s overcapacity, Treasury official says

Notable Snippet: Jay Shambaugh, Treasury Undersecretary for International Affairs, told a Council on Foreign Relations event that China’s production has become “untethered” from its own demand or demand in the global economy, unleashing exports that threaten jobs in the U.S. and other countries.

He said the traditional trade defence toolkit, including the “Section 301” tariffs that President Joe Biden recently increased, may not be sufficient to deal with such challenges.

“More creative approaches may be necessary to mitigate the impacts of China’s overcapacity,” Shambaugh said. “We should be clear: defence against overcapacity or dumping is not protectionist or anti-trade, it is an attempt to safeguard firms and workers from distortions in another economy.”

A group of bipartisan lawmakers and steel producers earlier on Wednesday called on Congress to pass new legislation that would apply U.S. anti-dumping and anti-subsidy duties on Chinese goods to those produced by Chinese companies in third countries.

The Biden administration also on Wednesday unveiled a new effort with Mexico to combat China’s circumvention of U.S. steel and aluminium tariffs, instituting a new North American “melted and poured” standard for steel imported into the U.S. from Mexico.

He defined China’s overcapacity as “production capacity in excess of domestic demand and untethered from global demand,” stemming from persistent overinvestment that is facilitated by extensive state support.

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China is leading on GenAI experimentation, but lags U.S. in implementation, survey shows

Notable Snippet: Chinese companies are leading the way in the experimentation of generative AI, but they’re still behind the U.S. when it comes to full implementation, according to a new survey.

The survey — by AI analytics and software developer SAS Institute and market researcher Coleman Parkes — found that 64% of Chinese companies surveyed were running initial experiments on generative AI but had not yet fully integrated the tech into their business system.

In comparison, 58% of companies in the UK and 41% in the U.S. were still experimenting with it.

The survey respondents were decision-makers in GenAI strategy or data analytics in 1,600 organisations worldwide in key sectors, including banking, insurance, retail, and health care.

The U.S. tops the list in terms of integration of GenAI into their business process, with 24% of the companies having fully implemented the tech — compared to 19% in China and 11% in the UK.

Chinese organisations are leading in the adoption of generative AI, with 83% of them either running initial tests or having fully implemented the technology. That’s much higher than the United Kingdom at 70%, followed by the United States at 65% and Australia at 63%.

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Phan Vee Leung
CIO & Founder, TrackRecord