Inflation, Trumpflation and Technological Optimism

WEEKLY UPDATE

Rising Interest Rates in the US

The first full workweek of the year has been characterised by rising global interest rates as the US economy continues to perform well. This was further confirmed by a strong jobs report on Friday, prompting the Federal Reserve to signal that interest rate cuts are off the table. Additionally, topics like tax cuts, deportation of illegal workers, and increasing import tariffs returned to the agenda. These are not new developments, as they were discussed shortly after the US presidential election in Week 46. However, with Trump’s inauguration approaching, market participants are shifting toward sectors expected to benefit from his policies and away from those likely to face challenges under his administration.

Concerns About Trumpflation Reignite

As Trump prepares to take office in the Oval Office, the bond market has particularly reacted. The main concern is again the potential for rising inflation alongside already strained public finances. Trump’s policies send mixed signals, with tax cuts pointing toward higher inflation, while efforts to reduce unnecessary bureaucratic spending suggest the opposite.

This week, investors leaned towards the view that the public budget deficit is likely to be significant again by the end of 2025. This implies rising interest rates as new debt is issued to cover ongoing deficits. Although this is not a new concern, Trump’s inauguration on January 20 brings it closer to reality.

Renewed concerns led to a good week for safer stock market sectors, particularly gold, which saw solid gains in line with rising interest rates.

Biden Ends on a High Note

The latest US jobs report under President Biden showed a gain of 256,000 jobs, exceeding Bloomberg’s expectation of 165,000. Job creation has slowed in 2024, averaging 190,000 per month over the last four months compared to 250,000–300,000 earlier in the year. This reflects a deliberate strategy by the Federal Reserve to cool the labour market with sustained high interest rates.

As previously mentioned, uncertainties remain high due to Trump’s policy initiatives. This has prompted the Federal Reserve to adopt a cautious approach to monetary policy changes, as the economic outlook remains unclear. Today’s figures reinforce the impression that immediate interest rate cuts are unnecessary, which naturally put further upward pressure on rates.

Higher-Than-Expected Inflation in Europe

Unlike the US, where expectations for upcoming rate cuts have been subdued for some time, Europe has seen a weak economy with little sign of inflation. This has led markets to anticipate more rate cuts in 2025. However, preliminary inflation figures released on Tuesday (final figures are expected later in the week) surprised on the upside. This dampened expectations for the pace of rate cuts in Europe, which significantly affects the development of variable-rate European mortgages. While five rate cuts were previously expected over the next five meetings, current expectations now lean toward two 0.25% cuts in the next two meetings, after which the ECB may adopt a more cautious approach.

Quantum Leap Delayed

Several stocks in the quantum computing industry saw sharp declines on Wednesday after NVIDIA CEO Jensen Huang stated that it would likely take 20 years before we see truly useful quantum computers. Following significant price increases in Q4 2024, companies such as Rigetti Computing, D-Wave Quantum, and Quantum Computing Inc experienced drops of around 40%. This is unsurprising, as profit prospects have now been pushed far into the future.

NDI-FUTURETECH

NDI-FutureTech is still at the start line with a return of just under zero percent this year.

This week’s topic is inspired by a podcast that sparked many reflections on how Europeans perceive developments in the US. There appears to be a markedly different view of the US, Trump, and Musk compared to perspectives often seen in the region. While many European commentators focus on caution and avoiding potential risks tied to figures like Elon Musk and Donald Trump, our analysis suggests that this perspective may overlook significant opportunities.

It is worth emphasizing two points:

1. This is not a political commentary, but understanding the political implications of technology is essential for investment strategies.
2. These observations highlight a divergence in perception between Europe and the US, rather than expressing a personal opinion.

Weekly Information Sources Our primary sources for insights include:

• Bloomberg: Bloomberg Live TV and the Odd Lots podcast provide expert interviews on emerging technology trends.
• Company Management Interviews: These leaders offer practical experience and a deep understanding of their fields.
• Tech Podcasts: Notably All-In, Pathfinder, and Acquired, which deliver detailed market analyses.

It is notable that many respected figures in the technology sector, including Jensen Huang, Chamath Palihapitiya, and David Sacks, hold significant regard for Elon Musk and view Trump’s economic policies as favorable for growth. In contrast, European perspectives often dismiss these figures and focus on caution rather than opportunity.

Interestingly, this perspective is not confined to US-based investors. For example, recently NewDeal Invest members met with a Spanish hedge fund manager, it was evident that even value investors are making exceptions to their traditional strategies to invest in companies like Tesla and SpaceX, primarily due to their confidence in Elon Musk’s vision and leadership. This contrasts sharply with the more cautious consensus often seen in European markets, where Musk and Trump are frequently dismissed.

We believe this collective caution may result in missed opportunities, particularly as the US technology sector appears poised for significant advancements in the coming years. A specific example is the ongoing expansion of data center infrastructure in the US, with substantial investments such as the $20 billion commitment from Arabian DAMAC. These developments align with what we term "specific technological optimism", a forward-looking approach that has largely been absent since the 1970s.

Jensen Huang stands out as a central figure in promoting this vision, much like how soccer fans view stars such as Messi and Ronaldo. His ability to articulate where the world is heading technologically makes him a compelling voice in this space. We love technology, and as a result, we end up watching Jensen Huang's keynotes instead of soccer matches simply because it is so incredibly exciting. Jensen Huang is by far the best at conveying where the world is heading. Just as a football fan admires Messi for his skills with a ball, we admire Elon Musk and Jensen Huang for what their minds can achieve.

In the short term, stock performance is determined by companies' short-term economic developments. There is much discussion about how expensive the S&P 500 is right now. Here you can see Brad Gerstner discussing earnings expectations for 2025. The interesting point is that MAG5's earnings growth is expected to decline, while the rest of the S&P 500 is projected to grow earnings by 11% in 2025, up from 2% in 2024.

Whether it is precisely MAG7 that is expensive can be questioned. In the long term, we do not think so, because as Jensen Huang explains here, we are entering an industrial revolution, which will give significant growth in 'inference'.

Our conclusion is that Europe’s collective understanding of technology may suffer due to an aversion to certain high-profile individuals. For us at NDI-FutureTech, these figures represent the forefront of innovation, much like iconic athletes define excellence in sports. This admiration drives our focus on developments within sectors like microchips, which we anticipate will play a pivotal role in shaping the future.

THE WEEK AHEAD

Politics will dominate the week as the earnings season kicks off again

As we enter the last week before the inauguration of the upcoming US President Donald Trump, markets will continue to be (over)sensitive to the potential impact of new statements from Trump regarding political plans.

On the macro data, it looks a bit thin, but we do get the final inflation figures, which we got a hint of last week. Among other things, we get December CPI figures from the USA, France, and the United Kingdom on Wednesday, Germany on Thursday, and finally the Eurozone on Friday.

The German ZEW, which gives an indication of the financial sector's view of the economic situation, will be closely watched on Tuesday, as will China's GDP for the fourth quarter, which will be released late Thursday.

Following this week's turmoil in interest rates and the announcement from the Fed, we will see FOMC members give speeches throughout the week, which will provide details on the current FED thinking.

Finally, the fourth-quarter earnings season begins on Wednesday, as usual, with results from major banks JP Morgan, Wells Fargo, Blackrock, and Citigroup.