Pro Perspectives 3/19/25

 

 
 

 

 

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March 19, 2025

We heard from the Fed today.

They held rates steady at 4.25%-4.5%.

Stocks went up.  Yields went down.  The dollar went down.

But if we look at the Fed’s updated projections, they revised growth DOWN and inflation UP.

And while the “median” projection for rate cuts by year-end was unchanged at 50 basis points, the weighted-average target from the 19 Fed officials came in 17 basis points higher than the last time they did this exercise, back in December.

So, in this summary of economic projections, the Fed sees a worse economy, higher inflation and fewer rate cuts than in December.

None of that warrants the market reaction we had today.

But the Fed did something else today.

Beginning next month, they will sharply slow the pace that they have been shrinking the balance sheet — from $25 billion a month, to $5 billion a month.

Why?

As Jerome Powell said in his press conference:  “We have seen some signs of increased tightness in money markets.”

That sounds familiar.

Remember, back in 2019, the Fed spent eighteen months shrinking the balance sheet, draining liquidity from the financial system, and they created a cash crunch (a scramble for dollars in the interbank lending market).

This happened …

The Fed described this chart above as: “strains in money markets that occurred against a backdrop of a declining level of reserves, due to the Fed’s balance sheet normalization and heavy issuance of Treasury securities.”

What does that mean?

The pendulum swung from too much liquidity, to too little liquidity.

This was the Fed’s unforeseen consequence of balance sheet “normalization.”

They were forced to put it all in reverse, to pump liquidity back into the financial system, and at a record rate (i.e. it was a return to QE).

With that, clearly Jerome Powell is highly sensitive to signs of stress in money markets.

 

 

Pro Perspectives 3/18/25

 

 

 

 

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March 18, 2025

Jensen Huang delivered his keynote at Nvidia's annual GTC developers conference today.
 
Before we get into the key takeaways, let's revisit what’s changed since the launch of the Chinese DeepSeek model earlier this year.
 
Remember, the "breakthrough" from the DeepSeek model, was the ability to enhance existing foundation (large language) models.  And do so at a low cost. 
 
This innovation slashed the barriers to AI model development.  That means broader AI adoption and more AI consumption.

 
With that, more AI models mean more inferencing.
 
More inferencing means more data creation (by the models), which leads to … more inferencing.
 
This is all a formula for more and more demand for computing capacity — and that further cements Nvidia's leadership role in the technology revolution.
 
Add to that, today Jensen showed how the entire AI ecosystem is coming together, and Nvidia is involved in every part of it — from the hardware that powers AI, to the software that makes it smarter and smarter, and the systems that will bring it to life in products like autonomous robots.
 
That said, at this stage, AI advancement is being limited by computing capacity.  We've seen it in Nvidia's quarterly earnings.  
 
Remember, the growth (in new revenue dollars) in Nvidia's data center revenue has been on a rhythm of about $4 billion a quarter since the second half of 2023.  Taiwan Semiconductor, Nvidia's manufacturing partner, is clearly maxed out. 
 
And yet, Jensen said today that he expected the global data center buildout to reach a trillion dollars by 2030.  We can only assume new advanced chip making capacity would have to come on-line for that to be fulfilled. 
 
The next "limitation" to the speed of AI advancement, noted by Jensen today:  Energy.
 
The future of AI isn’t just about making more chips. Eventually, the ultimate limit will be how much power you can deliver to these systems.  Faster inferencing, means higher performance, which translates into more revenue.  And revenue will be determined by your access to energy. 
 

Pro Perspectives 3/17/25

 

 
 

 

 

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March 17, 2025

It’s a big week.

Nvidia kicked off its annual developers meeting today (called GTC, “GPU Technology Conference”).

And tomorrow afternoon Jensen Huang will give the keynote speech, where he will educate the world on the state of the AI revolution.

Earlier this year, he said the theme of 2025 would be physical AI.  This is where AI systems integrate with the physical world.

And Jensen has said in the past that physical AI will reshape $100 trillion worth of global industry.

Physical AI is about robots.

And ahead of this week’s GTC event, Nvidia’s head of research said “this is the year of humanoid robots” — the hardware capabilities are rapidly improving, so are the foundation models (the AI brain), and the costs are coming down.

Keep in mind, Jensen has equated this combination of robotics and AI (“general robotics“) to the launch of ChatGPT, which he described as the defining moment that “crystallized” how large language models would translate to a product and service.

And two months ago, he said the general robotics “moment” was “just around the corner.”

With that, we head into this event with the S&P having hit official correction territory last week (-10.6% peak to trough in the S&P futures), and the Nasdaq having retraced back to this big trendline that represents the rise from … the “ChatGPT moment.”

So, we should get some optimism on the technology revolution for markets to digest this week.

And we’ll also hear from the Fed on Wednesday.

Heading into this meeting, the interest rate market is now back in-line with the Fed rate outlook for the year (2 cuts) — pricing in a June cut and one in September.  So, market expectations have trimmed rate cut expectations over the past week.

With that, anything more dovish leaning in the Fed commentary should be taken as a positive for stocks, even though it would likely come as a condition of anticipated weakness in the labor market (i.e. DOGE job government cuts).   Why a positive?  It would communicate to markets that they are paying attention, and ready to react.

 

Pro Perspectives 3/13/25

 

 

 

 

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March 13, 2025

We've talked about the 800 billion euro (+) debt deluge promised in Europe over the past two weeks, and it comes only a little more than a decade removed from a sovereign debt crisis.
 
Remember, that massive "defense funding plan," committed to by the unelected European Commission, resulted in a spike in the German 30-year bund, which was the biggest spike since 1990.  And it resulted in the spike in the German 10-year yield (the absolute basis point move) that is only matched two other times in the past 13 years, one of which was in late 2011 when Greece was teetering on the edge of default.
And we also talked about this next chart of French 10-year government bond yields, as the spot to watch. 
 
A breakout in the yields of this key sovereign debt market in Europe, would almost certainly lead to the ramp of speculative French bond selling (higher and higher yields), which would quickly spread to the other fiscally weak euro zone bond markets.  
 
 
Why France?  
 
France is running a 5.5% budget deficit, with 110% debt to GDP – nearly double the debt and deficits of Germany, yet borrowing at just 70 basis points over Germany's borrowing rate. 
 
Piling on another massive tranche of debt, should raise the borrowing rates of both, which makes servicing debt in the fiscally fragile parts of the euro zone, like France, more and more difficult.  And that dynamic should only increase the spread between French and German borrowing rates (which means, ever increasing borrowing rates on French government debt).
 
Now, in the above, when I say "should," it implies that the bond market is determined by market-forces. 

 
But in Europe, the European Central Bank has already committed (back in July of 2022) to ensure that its constituent government bond markets stay orderly (i.e. that rates are contained).
 
Despite the fact that they ended QE in early July of 2022, and that they've been shrinking the ECB balance sheet, they have the "anti-fragmentation" program (QE by another name) locked, loaded and ready to fire at any time, to buy as many government bonds in Europe as needed to maintain sustainability of bond markets (and therefore financial stability, and therefore the sustainability of the European Monetary Union).  
 
So, this brings us to today. 
 
German yields were in breakout territory this morning.  French yields continue to hang around these vulnerable breakout levels. 
 
But yields backed off the highest levels of the day, and broadly finished lower.  
 
Do we have any clues that perhaps the market is sniffing out some ECB intervention, either current or in the near future?
 
Gold. 
 
Gold broke out today to new record highs, up almost 2%, with the futures market now trading at $3,000.  Is the market sniffing out a new wave of debt monetization in Europe?  Maybe.     

Pro Perspectives 3/12/25

 

 

 

 

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March 12, 2025

The February inflation report this morning showed core inflation falling to the slowest rate since April of 2021.
 
As you can see in this chart, the disinflation trend remains well intact.  
 
 
That said, this number continues to be propped up by stale rent data, known in the CPI report as "Owners' equivalent rent" (OER). 
 
OER represents more than one-third of the year-over-year headline CPI reading, and yet the data on the current rent climate show a national median asking rent in decline for the better of part of the past two years.
 
And the Fed has acknowledged the lagging features, or "base effects," in the data (when it suits them).  Which means, not only do they have the most restrictive policy stance among the major central banks, they are actually more restrictive than this chart reflects …  
 
 
And not too surprisingly, with the highest real rates among major central bank peers, the Fed's policy stance is delivering the lowest stock market returns among the group (since the launch of respective easing cycles). 

 

Pro Perspectives 3/11/25

 

 

 

 

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March 11, 2025

Let's take a look at a few charts …
 
Below, we have 15-day rolling periods of the S&P 500 futures, measuring the day-15 low against the day-1 high, and comparing the span of the move relative to other 15-day rolling periods.
 
 
As you can see to the far right, this recent decline is just over 10%.
 
And it's not an infrequent occurence over this 28-year history. 
 
But if we look back at the recent history with this degree of decline, we can find it with the carry trade unwind last year and the UK and European bond market stress in 2022. 
 
Now, we've talked over the past week about the debt deluge Europe is signaling.
 
And despite risking another European sovereign debt crisis with the plans for an 800+ billion euro spending spree, the euro went UP (and big).    
 
Let's take a look …
 
 
 
This is the full history of the euro, since its inception in early 1999. 
 
As you can see, the greater than four percent 5-day rise in the euro (highlighted in the yellow circle) has only happened six other times.  
 
Moving from left to right on the chart, it happened in December of 2000.
 
What was going on?  
 
Less than two-years into the existence of the euro, it had lost 30% of its value (relative to the dollar).  There was a crisis of confidence in the euro, and global central banks came in, in coordination, to prop it up.  
 
A sharp-five day rise in the euro happened in December of 2008.
 
It was largely due to dollar weakness, as the Fed slashed rates to zero following the failure of Lehman. 
 
Another sharp euro rise came in March of 2009, as the Fed started buying Treasuries in response to the Global Financial Crisis.  
 
The euro had sharp rise in August of 2015 — driven by China's surprise currency devaluation. 
 
The euro had a sharp 5-day rise in March of 2020.  That was the Fed and U.S. government covid response (dollar lower, euro higher).  
 
It happened in November of 2022.  This was the blow-up of the crypto firm FTX.
 
So, the observation from these six rare spikes in the euro: these moves in the currency all align with very significant events. 
 
With that, we now have this recent sharp spike in the euro, and it's associated with the European Commission's announcement of massive fiscal expansionary policy — another very significant event.
 
Will this fiscal plan will be a growth catalyst for a stagnant European economy?  Or will it trigger another episode of chaos in European government bond markets, and thus another rescue effort by the European Central Bank.  In the case of the latter, the future of the euro would be in question. 
 
With that, this chart is the one to watch.  A break higher in the French 10-year yield, from here, would likely turn market attention to the weak spots of the euro zone bond markets …
 
  

Pro Perspectives 3/10/25

 

 

 

 

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March 10, 2025

We've been watching this trendline in the Nasdaq.  It traded into the line on Friday (precisely on the number) and bounced 500 points. 
 
Today it gave way …
 
 
So, now we've broken this key trendline that represents the AI-theme — a trend that was catalyzed by the launch of ChatGPT back in November of 2022.
 
And we have a similar trend in the S&P 500 that has broken down — this line, representing the rise in the anticipation of a Fed easing cycle. 
 
 
With this S&P chart in mind, remember, back in October of 2023 the Fed had stubbornly held rates well above 5% (the orange line in the chart below), while inflation was on a consistent path lower (blue line). 
 
 
As you can see in the chart, the longer the Fed held rates steady, the tighter policy became, as inflation continued to fall.  And it was the bond market that ultimately forced the Fed's hand. 
 
The Fed finally folded when the 10-year yield hit 5% (the danger zone for financial stability) and stocks were in an 11% correction.  They walked back on a final rate hike they were telegraphing and began to start telegraphing the easing cycle. 
 
Yields fell. Stocks began this 50% climb (the S&P chart above).
 
Staying with this S&P chart, you can see the path of rate cuts along the way. 
 
December was the Fed's last cut.  And remember what came with it — a hawkish policy adjustment (at least in the form of "guidance").
 
With that December cut, the Fed showed its bias on Trump policies in their Summary of Economic Projections (SEP), proactively revising UP their view on growth AND inflation.  And they took two projected rate cuts off of the table.
 
Then they hit pause on the easing cycle in late January.
 
And with that, and the influence of Fed rhetoric, as of one month ago the market had priced in a small chance of ZERO rate cuts this year.
 
So, this was a big swing in interest rate expectations, for the roughly six weeks following the December Fed meeting.
 
Meanwhile, two developments have countered the Fed's December outlook: 1) early indications from the Trump trade war suggest disinflationary pressures, as tariffs are dampening global sentiment, and 2) Nvidia's recent earnings, as a key barometer of the tech revolution, confirm that manufacturing capacity constraints are throttling the speed of innovation.
 
Add to this, the coming labor market shock from the DOGE belt-tightening should meet the Fed's condition of "unexpected weakness" in jobs, which is a stated condition (by the Fed) for a "reaction" (i.e. easing). 
 
With all of the above in mind, both the bond market (chart below), and the stock market (charts above), seem to be telling us, the Fed pause was a mistake.   
 
 
 

Pro Perspectives 3/6/25

 

 
 

 

 

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March 06, 2025

We get the February jobs report tomorrow.

Remember, the BLS numbers cover up to just the 12th of the prior month, so most of the DOGE job cuts thus far should show up on the next report, in early April.

That said, against the market expectations of 150k-160k jobs added and a 4.0% unemployment rate (both of which are right on the average of the past year), it sets up for a negative surprise.

And we’ve had some clues from the private jobs reports this week.

On Wednesday, the ADP report for February came in at 77k jobs added, about half of what was expected.

And this morning a report from the recruitment firm Challenger, Gray showed the biggest layoffs in February since the covid lockdown era, and the depths of the global financial crisis.

So, clearly a labor market shock is coming.

How much will come tomorrow?

If we look back at just the January report, of the 143k jobs added, 38k were government.  But then there was 22k added in “social assistance” and 44k added in healthcare.  Government directly funds about 70% of social assistance programs, and about half of national healthcare.

The rough math suggests at least half of the jobs added in January were government related.  So, for February, we add in a combination of some degree of government job cuts and a hiring freeze, and we should expect a number that undershoots the consensus view.

And remember, the Fed is highly sensitive to a deterioration in the labor market.  In fact, they’ve been telling us for the past year that signs of “cracks” would be a condition to “react” (i.e. rate cuts).

And as we’ve discussed in my daily notes, history suggests the Fed is more comfortable doing clean up and rescue, than proactive fine tuning.

So, they will wait until they see it.  And they may get a “crack” tomorrow, with a bigger chasm coming next month.

With that, the market has been stepping up bets on a May rate cut (now about a coin flips chance).  But they continue to underprice the probability of a cut at the March 19th meeting — especially given the deteriorating stock market.

With that, we go into tomorrow’s job number with the S&P having already broken this very significant trendline that represents the anticipation of a Fed easing cycle. 

   

And the Nasdaq looks likely to test this big trendline we’ve been watching, which was induced by the “ChatGPT moment.”

A test of this line would represent a 12% correction in the Nasdaq.

What would be a relief valve for stocks?  A Fed “reaction” to cracks in the job market.  If not a March cut, then at least communication to markets that they are ready to act, to do more, and earlier than the market has priced in.

 

Pro Perspectives 3/5/25

 

 

 

 

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March 5, 2025

We talked yesterday about the fiscal spending spree in Europe.
 
It's bigger now.
 
In coordination with the European Commission's 800 billion euro "defense funding" plan, the German government has announced a 500 billion euro plan to contribute to the euro-wide defense funding AND to fund infrastructure.
 
So, this is a debt deluge in Europe, and it comes only a little more than a decade removed from a sovereign debt crisis in Europe.
 
As we discussed yesterday, what averted the debt crisis from becoming a cascade of debt defaults and ultimately a collapse of the monetary union (the euro), was intervention by the European Central Bank.  
 
Back in the summer of 2012, Mario Draghi (ECB President) vowed to do "whatever it takes" to save the euro.  He threatened to buy unlimited bonds of the weak euro zone countries, to ward of speculators and bring down the unsustainably high government borrowing rates (particularly of Italy and Spain).
 
Now we have the new leader of the German government invoking the same words when it comes to fiscal spending to defend the continent: "whatever it takes."
 
Is this reorientation in Europe around "whatever it takes" fiscal policy to 1) catch up in AI, and 2) build independence in defense capabilities, a greenlight to buy all things Europe? 
 
Or is it a catalyst for a bond market shock, given the flaws exposed in the monetary union from the global financial crisis?
 
So far, the signals are mixed.
 
The euro has rallied.  German stocks are hanging around record highs. 
 
But the yield on the German 30-year bund had the biggest spike today since 1990.  And the spike in the German 10-year yield (the absolute basis point move) is only matched two other times in the past 13 years, one of which was in late 2011 when Greece was teetering on the edge of default.      
 
 
Keep in mind, Germany is the most rigid fiscal conservative in the euro zone, and the economic engine of Europe. 
 
If relaxing deficit spending constraints for a country with 62% debt-to-GDP and a tiny budget deficit results in a 35-year-event-like bond market penalty, then what does that mean for the French bond market, a fiscally profligate country running a 6% budget deficit with debt well in excess of 100% of GDP?
 
 
As you can see in the chart above, the move in the French 10-year yield today was on par with the Silicon Valley bank crisis period, and the days surrounding the European and UK bond market stress in 2022.  And it's probably just getting started. 
 
With that, this "whatever it takes" fiscal response in Europe looks less like a greenlight to buy Europe, and more like a European sovereign debt crisis (2.0) risk.  
 

Pro Perspectives 3/4/25

 

 

 

 

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March 4, 2025

Over the past few weeks, Europe has been working up plans for a massive fiscal spending spree.
 
It started last month with a pledge of 50 billion euros for AI infrastructure, in a plan that included 150 billion euros of private investment (likely to be supported by cheap liquidity from the European Central Bank). 
 
And this past weekend, European leaders held emergency meetings to devise a gameplan to backstop Ukraine, if Trump were to end U.S. funding.
 
What's the gameplan?
 
They want to spend 800 billion euros to "rearm" Europe.   
 
To do so, they want to relax the budget deficit limits imposed on member states through Europe's Growth and Stability Pact — allowing them to ramp up defense spending.
 
So, more deficit spending.  More debt. 
 
They think this will get them 650 billion of the 800 billion euros.  And then the European Commission will plug the remaining 150 billion euro gap with loans to member states. 
 
And guess who provides the financial guarantees that allow the European Commission to borrow? 
 
The member states. 
 
So, this is just off-balance sheet borrowing, which effectively compounds the debt burden of member states. 
 
That all said, Europe has its fiscally weak spots, namely Italy and Spain.  And both were on default watch in 2012, only to be saved by a central bank rescue — which, to this point, appears to have become a permanent feature.  
 
What's the point? 
 
For this 800 billion euro funding plan to work, without triggering another European sovereign debt crisis, the ECB will be back in action — more central bank backstops (at least verbal, if not more QE), to tame the bond yields of the fiscally vulnerable countries. 
 
That's bearish for the euro, bullish for gold.