Pro Perspectives 6/6/24





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June 06, 2024

This morning, the European Central Bank became the fourth G10 central bank to cut rates.
Let's talk about the nuance Lagarde (ECB President) used to insist that they are still in the inflation fighting stance (headline below).
In September, euro zone inflation was running 2.9%. 
The ECB's policy rate was 4%.  That's 110 basis points ABOVE the inflation rate (i.e. the "real" interest rate).  
Today, AFTER the cut, the real rate is 115 basis points.  So, as she said, policy is tighter today, even after the rate cut. 
This is what we've been discussing along the path of the fall in inflation in the U.S.  Once the annual rate-of-change in prices fell below the Fed's policy rate (effective rate of 5.33%), the Fed's stance has only become tighter and tighter as inflation has declined. 
Here's what that looks like …
So, the Fed is currently 268 basis points above the rate of inflation.  That's historically very restrictive monetary policy.  Similar to the ECB, they could cut rates right now, and still be left with a tighter policy stance than they had last October (which, coincidentally, is when Jay Powell signaled the end of the tightening cycle).
As you can also see, the current real interest rate is more than 200 basis points higher than where the Fed projects the longer term real Fed Funds Rate ("the Fed's Projected Real Neutral Rate" … where they deem the rate to be neutral — not stimulative, nor restrictive).  
Bottom line:  The Fed could make the same case Lagarde made this morning, cutting rates but continuing the inflation fighting stance — given that real rates would continue to be very restrictive. 
Lagarde may be the Fed's test subject on a way to start the easing cycle, without stoking much excitement in markets, consumers and businesses (which could translate into renewed inflation pressures). 
Let's talk about Nvidia.
Nvidia will split at the close of business tomorrow (shareholders get 10 shares for every 1 share owned).  As we discussed following the Nvidia earnings a couple of weeks ago, this split looks a lot like the 2014 Apple split.  
Apple announced a 7-for-1 split when the stock was in the mid $500s, and ran up to around $700 by the time of the split.  Nvidia has nearly replicated the pre-split premium (just shy of 30% added since the announcement).
As we also discussed, as with Apple, Nvidia's post-split lower share price creates an opportunity for inclusion into the Dow (DJIA).
That should turn market attention to the Dow, which has been lagging the Nasdaq, as you can see in the chart.  Moreover, the Nasdaq has more than doubled the performance of the DJIA since the "Nvidia moment" in May of last year. 
We get the May jobs report tomorrow morning
Remember, the Fed has told us they are watching the job market "carefully" for "cracks" as a condition to start the easing cycle.