When will there be rate cuts?

Thoughts of the Day

For the US Federal Reserve to start cutting interest rates, inflation will have to start heading towards the 2% again or for the jobs market to weaken significantly from here. We are starting to see signs of faltering growth in the jobs market, but inflation remains sticky.
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Day Ahead

Nothing noteworthy on the horizon.

Earnings: Uber Technologies (UBER), Arm Holdings (ARM)

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What Happened Yesterday

Market Movements as of New York Close 7 May 24

Fedspeak:
Kashkari (2026 voter, known hawk):
“Inflation moving sideways raises questions about how restrictive policy is. Raising rates is not the most likely, but it can’t be ruled out. Friday’s jobs report was softer than expected, but not actually soft. If disinflation returns, or we see marked weakening in the job market, that might lead to rate cuts.”
(Kashkari is starting to sound neutral compared to his previous comment that the Fed cannot stop short on its fight against inflation.)

Reserve Bank of Australia Monetary Policy – interest rates kept unchanged at 4.35% as expected. The central bank cited that the moderation in inflation was slower than expected and lagged effects of monetary policy remains uncertain.The RBA also noted that assurance that inflation is headed towards 2-3% is needed. Governor Bullock also added in her press conference that the central bank may not have to tighten again. The AUDUSD fell -0.27% from 0.6626 to 0.6608 in immediate reaction.

The US 2-year bond yield remained at 4.83% while the 10-year yield fell -0.03% to 4.46% resulting in the US Treasury Yield curve inversion widening to 0.37%. 

The US stock futures traded sideways through the Asian and London trading sessions with some positive momentum as the New York session approached. The S&P 500 futures was up +0.23% when the New York session began.

The US stock market opened higher from Monday. It traded within a relatively small range due to the lack of market drivers. The S&P 500 finished +0.13% higher on the day (high: +0.38%, low: -0.03%), the Dow Jones rose +0.08% (high: +0.32%, low: -0.03%) while the Nasdaq edged -0.01% lower (high: +0.35%, low: -0.18%).

The crypto market range traded for the bulk of Tuesday but started to trade lower in early Wednesday Asian hours. As a result, Bitcoin and Ether are down -1.3% and -1.9% respectively.
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Headlines & Market Impact

Stanley Druckenmiller cut his Nvidia stake in late March, says AI may be a bit overhyped short term

Notable Snippet: Billionaire investor Stanley Druckenmiller revealed Tuesday that he slashed his big bet in chipmaker Nvidia earlier this year, saying the swift artificial intelligence boom could be overdone in the short run.

“We did cut that and a lot of other positions in late March. I just need a break. We’ve had a hell of a run. A lot of what we recognized has become recognized by the marketplace now,” Druckenmiller said on CNBC’s “Squawk Box.”

Druckenmiller said he reduced the bet after “the stock went from $150 to $900.” “I’m not Warren Buffett — I don’t own things for 10 or 20 years. I wish I was Warren Buffett,” he added.

The notable investor, who now runs Duquesne Family Office, said he was introduced to Nvidia by his young partner in the fall of 2022, who believed that the excitement about blockchain was going to be far outweighed by AI.

“I didn’t even know how to spell it,” Druckenmiller said. “I bought it. Then a month later, ChatGPT happened. Even an old guy like me could figure out okay, what that meant, so I increased the position substantially.”

While Druckenmiller has cut his Nvidia position this year, he said he remains bullish in the long term on the power of AI.

“So AI might be a little overhyped now, but underhyped long term,” he said. “AI could rhyme with the Internet. As we go through all this capital spending, we need to do the payoff while it’s incrementally coming in by the day. The big payoff might be four to five years from now.”

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US revokes some export licenses for firms supplying China’s Huawei

Notable Snippet: “We have revoked certain licences for exports to Huawei,” the Commerce Department said in a statement, declining to specify which ones it had withdrawn.

The move, first reported by Reuters, comes after concerted pressure by Republican China hawks in Congress who have been urging the Biden administration to take tougher action to thwart Huawei.

“This action will bolster U.S. national security, protect American ingenuity, and diminish Communist China’s ability to advance its technology,” Republican Congresswoman Elise Stefanik said in a statement.

Depending on which licences were revoked, the move could also hurt Huawei which still relies on Intel chips to power its laptops, and could hurt U.S. suppliers that do business with the company.

However, Qualcomm still licences its portfolio of 5G technologies to Huawei, which last year began using a 5G chip designed by its HiSilicon unit that most analysts believe is manufactured in violation of U.S. sanctions. Qualcomm said in the filing this month that its patent deal with Huawei expires early in Qualcomm’s fiscal 2025 and that it has started negotiations to renew the deal.

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BOJ’s Ueda signals chance of policy action if yen moves affect inflation

Notable Snippet: Bank of Japan Governor Kazuo Ueda said on Wednesday the central bank may take monetary policy action if yen moves have a big impact on inflation, escalating his warning against the economic fallout from the currency’s recent sharp declines.

A weak yen affects the economy in various ways including by pushing up import costs, and affecting demand for goods and services, Ueda said.

While the BOJ won’t seek to directly control yen moves with monetary policy, it will scrutinise the potentially huge impact they could have on the economy and prices, Ueda said.

“Companies’ wage- and price-setting behaviour is becoming somewhat more active. As such, we need to be mindful of the risk that the impact of currency volatility on inflation is becoming bigger than in the past,” Ueda said.

“Exchange-rate moves could have a big impact on the economy and prices, so there’s a chance we may need to respond with monetary policy,” Ueda told parliament.

The remarks compared with those Ueda made after the BOJ’s policy meeting last month, when he said the yen’s recent falls did not have an immediate impact on trend inflation.

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord