The minutes from the Federal Reserve’s (Fed) latest monetary policy meeting showed that the Fed members agreed to ‘proceed carefully’ with their future rate decisions. Carefully doesn’t mean that the Fed is done tightening, it means that it will ‘proceed carefully’ in the light of the economic data and the market conditions to decide whether it should hike, pause, or cut the interest rates. Note that ‘most’ members ‘continued to see upside risks to inflation’.
Alas, the cautious tone in Fed minutes went completely unheard as the latest CPI data acted as a shield against the Fed hawks. As such, the market reaction to the Fed minutes was muted. The US 2-year yield remained little changed near the 4.90% level, the 10-year yield rebounded past 4.40%, and is still around 60bp lower than the October levels. The S&P 500, which is now trading in the overbought market, retreated 0.20% and Nasdaq 100 fell 0.60% from an almost 2-year high, as investors didn’t want to do much before seeing the Nvidia’s results.
When Fantastic Falls Short
Nvidia’s Q3 results were strong. The company exceeded the $16bn revenue forecast by $2bn. They earned more than $18bn, made more than $4 profit per share and said that they will be earning around $20bn this quarter. But the latter forecast couldn’t meet the top forecast ($21bn) and the share price fell in the after-hours trading, though by less than 2%; investors couldn’t decide whether they should buy the fact that the company exceeded the sky-high expectations, or they should sell the reality that the chip sales to China will slow this quarter and that would weigh on revenue – although Nvidia (NASDAQ:NVDA) stated that the ‘decline will be more than offset by strong growth in other regions’ and that they are working to comply with regulations to sell to China, anyway.
Taking a step back: Nvidia is growing, it is growing fast, and it has the potential to grow further, but the valuation of the company is also sky-high, its price got multiplied by almost five since October 2022. Its PE ratio stands around 120 versus a PE ratio of around 25 in average for S&P 500 companies. And its market capitalization is more than $1 trillion more than Intel’s, which used to be the world’s biggest chipmaker. In summary, the company is growing but that strong growth is already priced in and out. Therefore, we will probably not see a big profit taking post-earnings, we will likely see correction and consolidation instead below the $500 psychological hurdle.
And with that – the Nvidia earnings – out of the way, the S&P 500 and Nasdaq futures are slightly in the negative at the time of writing. The market will likely digest the Fed minutes and the Nvidia results in a calm mood before the Thanksgiving holiday.
Hunt in the Spotlight
British Chancellor of Exchequer Jeremy Hunt will make his Autumn Statement today and he will do his best to try to please British voters by announcing tax cuts amid slowing inflation, try to make the Tories – who lost a lot of support over the past year-and-so and fell around 20 points behind Labour in the latest polls - look good again, while pursuing a hard-won economic and financial stability after the Liz Truss mini-budget crisis, and keep the country’s finances together to avoid another Truss-style bond meltdown.
Happily, for him, the Gilt yields have been falling along with other major economies’ bond yields since the October peak. The British 10-year yield tested the 4% level to the downside last Friday. Households are happy to see inflation slow, Rishi Sunak is living up – with a bit of luck – to his promise to halve inflation by year-end, and investors think that the Bank of England (BoE) is done hiking the interest rates. The BoE is also expected to start cutting its rates by May next year - to which the BoE Governor Bailey replies saying that if the market conditions loosen too fast, they may have to raise interest rates again. But that’s a detail. Cable advanced to 1.2560 yesterday on the back of a broadly softer US dollar. A too-generous Autumn Statement – in terms of pleasing voters – could revive the inflation expectations for the UK and hence tame the BoE doves. The latter could trigger a selloff in gilts, push yields higher and help sterling extend its gains against the greenback, and pave the way for a further advance to the 1.27 level.
Yet, Cable’s upside potential also depends on the dollar’s downside potential. The US dollar – which came under decent bearish pressure since the beginning of the month – is near the oversold territory. And the selloff in the dollar could soon bottom out given the Fed’s cautious tone faced with the significant decline in the US long-term bond yields.
Elsewhere the EUR/USD sees resistance above a major Fibonacci resistance, near the 1.0955 mark, gold is testing the $2000 per ounce this morning as investors chose safety into the long Thanksgiving holiday in the US while US crude sees resistance at the 200-DMA and Bitcoin is down from recent highs on news that Binance CEO was pleaded guilty as his company prioritized growth over compliance and violated anti-money laundering and unlicensed money transmitting to finance terrorists, cybercriminals and child abusers. The Binance verdict will hardly impact the recent appetite in Bitcoin, which is expected to get a boost thanks to potential spot ETF approvals.