This morning’s inflation report showed an uptick in prices in the month of January.

The monthly change in core CPI (excluding food and energy) was the hottest since April of 2023. 

As for headline CPI, the year-over-year change has been ticking higher every month since the Fed started its easing campaign back in September.

Does this mean the Fed made a mistake cutting rates? 

Is that why the market has taken the 10-year Treasury yield (the market-determined benchmark interest rate) 100 basis point(+) higher, while over the same period the Fed has taken the Fed Funds rate 100 basis points lower?

Unlikely.  This divergence has more to do with the health of the U.S. government bond market, than it does inflation picture.  

Keep in mind, the Fed still has the Fed Funds rate well ABOVE the rate of inflation (well over 100 basis points).  That “restrictive” stance continues to put downward pressure on the economy, and downward pressure on inflation.  So, the 100 basis points of rate cuts has merely reduced restriction. 

As for government bond yields, remember, as we’ve discussed coming into the year, the exiting Treasury Secretary (Yellen) has left the incoming Treasury Secretary (Bessent) with a third of the outstanding government debt to rollover this year, while saddled with planned budget deficit spending at record peacetime levels.

With that, let’s take a look at this chart below …

This chart dates back to 2011.  The blue bars represent the rolling 80-day change in the 10-year Treasury yield when that change exceeded 100 basis points.  

The bar on the far right (“recent”) is the most recent episode of this rare magnitude in the rate-of-change in bond yields.  And that bar denotes the sharp rise in the 10-year yield from this past September through January.  The rise started when the Fed made its first (50 bps) rate cut.  And it ended, topped out, just prior to the inflation report last month.

And as we discussed earlier this week, that top in yields came at 4.80%, an uncomfortable level for the Fed.  And with the 5% level in spitting distance (a vulnerable level for financial stability and fiscal sustainability), the tide was turned with just a slightly cooler core inflation number — but mostly from Fed officials overtly talking the interest rate market down.

With that, if we look at these other bars on the chart, we can see some commonalities with this recent episode. 

With Amazon’s report this afternoon, we are now through the big tech earnings, with the exception of Nvidia, which will come later this month.

So, the big question has been, given the DeepSeek news of the past two weeks:  Would the hyperscalers balk on the massive AI infrastructure spending plans?

For a clue, on the earnings call this after, Andy Jassy (Amazon CEO) called AI a “once in a lifetime business opportunity” when asked about AI capex plans.

So, the answer is no.

They are not pulling back.

Rather, they are all pressing the accelerator.  If we combine the planned capex spending for 2025, guided by Microsoft, Meta, Google, Tesla, Apple and Amazon — it’s over $300 billion.  It’s huge growth in spend from 2024 — about $100 billion more.

And they all credit it to “signals of demand.”  And Jassy admitted that they could be growing faster if not for supply constraints, namely “third party chips.”

So, that’s Nvidia.

On that note, over the past few quarters, we’ve been watching what is a rhythm at Nvidia, of consistently adding around $4 billion a quarter in new revenue.

That meant huge growth when applied against the low quarterly revenue base of four to six quarters ago.  But as the “new” revenue has proven to stagnate, the growth rate has been falling.

And as we discussed following the November report, if this trend of $4 billion per quarter in new revenue continues, the year-over-year Nvidia revenue growth rate will plunge to a rate closer to 50% by the third quarter of this year (from what has been triple-digit growth).

We know demand is insatiable, so we can deduce that the ability to grow new revenue is a manufacturing capacity issue, and that’s Taiwan Semiconductor.

And if we consider that American hyperscalers will take as much supply as Nvidia can offer, the export controls shouldn’t be a negative drag for Nvidia.

For Nvidia, it’s about this manufacturing capacity growth constraint.

And as we discussed following the November earnings, this presented some “resistance for the speed of change in the technology revolution, which should start to weigh on Nvidia shares.”

As you can see in the chart below, the November earnings was indeed a top.  A new top was just barely printed earlier this month after Jensen’s keynote at the CES conference in Las Vegas — and it’s been lower since. They report on the 26th.

The new Treasury Secretary has now been on the job for a week, and today he gave some signals to markets.

Signal #1): This morning, the Treasury released plans to rollover Treasury debt that matures in the quarter.

Remember, Bessent himself said that Janet Yellen left the bond market in a vulnerable position.  She funded the deficit last year, largely with short-term debt.  That helped to suppress longer-term interest rates, which proved to maintain confidence in markets at the time.

But it leaves Bessent with a third of the outstanding government debt to rollover this year.

For now, Bessent is going to stick with the Yellen’s strategy — not to rock the bond market boat.

It signals near-term stability, and the perception that Bessent is confident he’ll see lower rates later in the year, to issue longer term maturities.

The bond market liked it.  The 10-year yield fell 20 basis points on the day.

Signal #2): In an interview later in the day, Bessent made his appeal to Congress to make the 2017 Trump tax cuts permanent.  And adding a little pressure, he warned not doing so would result in the biggest tax hike in history.

Remember, in his Senate confirmation hearing three weeks ago, he said that if Congress were to communicate to markets, the intent to make the tax cuts permanent, that it would unleash animal spirits and “a new golden age” for the economy.

Signal #3): In the same interview, he conveyed confidence that inflation would come down, rates would come down, and wars would end, with the presence of lower energy prices (by “unleashing American oil”).

Signal #4):  When prodded for an official statement on the dollar, as Treasury Secretary, Bessent said, “there is no alternative to the dollar.”

The Trump agenda continues to move at a rapid pace, across a variety of fronts.

He’s effectively fortified the Western Hemisphere in a matter of days, restoring American influence, and buttressing economic and national security. 

Today, the Middle East:  He called for maximizing economic pressure on Iran, to “drive Iran’s oil exports to zero.”  He called for more Middle Eastern countries to sign the Abraham Accord, he hosted Netanyahu, and he floated a plan to take over Gaza and create a safe location to relocate Palestinians. 

Russia/Ukraine:  Trump demanded access to Ukrainian rare earths yesterday in exchange for America’s financial support.  A day later, Zelensky said he would be willing to sit down for peace talks with Putin.

As for the EU, tariff threats have already been lobbed, and it’s probably more about restoring U.S. influence than it is balancing trade.

As you can see in this PEW Survey, China has gained significant influence over Europe, and largely stemming from its role in bailouts, following the sovereign debt crisis in Europe a little more than a decade ago.  

So, the Trump agenda is moving quickly, and by necessity. 

As we discussed yesterday, dealing with China is priority number one.  But these other pieces need to be in place, because the Trump 2.0 trade war with China will likely require global participation (maybe putting China in the trade penalty box). 

It’s a multi-front fight.  It’s fighting to rebalance global trade, and weaken the global reliance on China (weaken China’s economic and political leverage). 

And, related and very importantly, it’s fighting to win the AI arms race with China, which is a winner takes all. 

The first to reach artificial general intelligence (AGI/human intelligence with autonomy), will likely set international standards, rules, and ethical guidelines around AI use and governance. Much like with the internet and social media, early technological dominance gives the leading nation the ability to influence frameworks on how the technology is used, regulated, and adopted globally. 

It (the winner) will probably be the difference between AI that serves humanity, or AI that controls humanity (serving the interest of the Chinese Communist Party).