Thierry Hasse: All eyes remain on inflation

Monday reflections

U.S. markets are finishing on a strong note for the first half of 2024. The S&P 500 Index is up nearly 15%, led by the enthusiasm around developing artificial intelligence technology. Market participants were unmoved by the unofficial launch of the presidential campaign, focusing instead on the continuing debate over the path of U.S. inflation.

AI Pullback?

Without a doubt, NVIDIA (stock ticker: NVDA) and the extraordinary increase in its share price over the last two years is the early winner in the race to deploy AI technology by corporations across many industries. Indeed, NVDA sales doubled to $61 billion in fiscal 2024 and are projected to almost double again in 2025 to over $120 billion (Source: Bloomberg News). Giant technology companies such as Meta, Google and Amazon, to name a few, have been spending heavily on the AI accelerator chips NVDA has been producing at full manufacturing capacity without any credible competitor.

However, last week was a cautionary tale of potential excess valuation. In a few days, the NVDA share price sustained a sharp correction of ~15%, or over $500 billion in value. There are questions about whether AI can start producing returns on those massive investments, and any sign that the durability of demand for its chips is weakening will lead to a significant revision of NVDA’s valuation.

Markets Ignore Presidential Debate

Financial market participants were fixated on the big event of last week: The first debate of the presumed U.S. presidential nominees on June 27. While we will not make any political comments here, the lack of reaction by every market was striking. The Treasury market barely moved, with only a couple of basis points change in the yield of the 10-year T-Note, and there were no discernible movements in commodities or in currency markets. Equity markets were little changed in after-hours trading and by Friday morning were turning their attention to the next economic indicator release. The bottom line is that political debate is largely ignored by financial markets. We believe that will change at some point.

All Eyes on Inflation

The release of the Personal Consumption Expenditures index last Friday morning was eagerly awaited as it is the Federal Reserve’s preferred measure of inflation. This is the index the Fed wants to see at their 2% target. Core PCE, excluding food and energy, rose 0.1% in May and was up 2.6% on a year-over-year basis. This increase represents the smallest rise since early 2021 (Source: Bureau of Labor Statistics). This is good news for market participants who have been watching the slow pace of improvement in the inflation picture over the last 12 months. But is that enough to start cutting rates?

Looking Ahead

As we celebrate Independence Day this week, market activity will be entirely centered on the July 5 release of the latest jobs report from the U.S. Bureau of Labor Statistics. Will the much-awaited cooling in the labor market finally arrive and enable the Federal Reserve to start normalizing monetary policy? We’re watching.

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