Tech Turbulence Unleashed: Surprises, Struggles and the Jackson Hole Symposium ???????
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August 25, 2023.
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These are the market updates for this week. ??
?? Generating AI ????
NVIDIA, the maker of high-end chips so integral to generative AI, surprised investors again. Back in May, the stock jumped 24% in a single day after the company announced strong revenues and stunning forward guidance. There was another positive surprise on Wednesday night with revenues beating expectations, and forward guidance raised again. Q3 sales are now forecast to come in around $16 billion, way above the $12.5 billion that analysts were expecting. In addition, the company announced a $25 billion share buyback. NVIDIA has a strong influence on the market, as it is the fifth largest stock by market capitalisation in both the S&P 500 and NASDAQ 100.?
?? Keep on running? ??♂?
Peloton was one of the great coronavirus success stories. Exercise-hungry customers (arguably with more money than sense) rushed to buy the stationary bikes, treadmills, courses and paraphernalia in an effort to keep fit during lockdown. But the fad wore off, and it didn’t take long for the company to run out of puff too. Their latest set of results brought little cheer to long-time investors as revenues declined 14% from the previous quarter. The stock lost 22% on the news, falling below $6 per share to hit an all-time low. That’s a loss of 96% from the high of $167 in early 2021.?
?? Tesla remains volatile?????
Like most tech giants, Tesla had a torrid time in 2022 thanks mainly to the US Federal Reserve’s programme of aggressive rate hikes. But it bounced sharply this year, rising 200% to around $300 by mid-July. Then it sold off again, down to $216 by Friday 18th August. It rallied sharply in the early part of this week, but lost 5% of its value on Thursday alone. The big question is: “Where now?” Tesla remains an exciting and volatile stock, and like NVIDIA, one that has a significant influence on both the S&P 500 and NASDAQ 100.?
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?? Jackson Hole Economic Symposium ????
The Jackson Hole Economic Symposium is held in Wyoming and hosted by the Federal Reserve Bank of Kansas City. It is attended by central bankers, finance ministers, academics and financial market participants from around the world. It takes on particular significance as it fills the gap between the Federal Reserve’s monetary policy meetings in July and September, and it has previously been the forum for market-moving announcements. The symposium runs from Thursday to Saturday but the keynote address came from Fed Chair Jerome Powell on Friday afternoon. In his speech, Mr Powell reiterated the importance of the central bank’s 2% inflation target, stressing that the Fed would raise rates further if appropriate, and hold them at restrictive levels to bring inflation down. He made it clear that Core PCE, that is Personal Consumption Expenditures excluding food and energy, was the key metric. While this had fallen from a peak of 5.4% year-on-year in February 2022 to 4.3% in July this year, it remains well above the Fed’s 2% target. He said that the last two month’s data was encouraging, but that the 12-month average was still too high. He pointed out that the labour market remained tight and that real wages were growing. In conclusion, he said the Fed would proceed carefully. It would have to balance the risk of doing too little, leading to inflation that became entrenched, against raising rates too much and harming the economy. Equity markets whipsawed around on the speech, but began to sell off soon after he concluded, as bond yields ticked higher.?
?? Looking ahead to next week ??
?? US inflation update ??
We get the latest US inflation update next Thursday. We saw the year-on-year Headline Consumer Price Index (CPI) tick higher earlier this month, having previously fallen in a straight line from +9.1% to +3.0% over the past year. Now we get an update on Core PCE (Personal Consumption Expenditures). Core PCE (which excludes food and energy) is not only the Fed’s preferred inflation measure, but also the metric against which the Fed measures its 2% inflation target. Core PCE came in at +4.1% at the end of July, which was a stark reminder of the ‘stickiness’ of core inflation numbers. This highlights the trouble that the Fed could have in getting back to its target rate. The markets are already expressing concern that the US central bank may raise rates by as much as 50 basis points before the end of this year. A major reason for this is that the Unemployment Rate remains near historic lows, allowing wage pressures to build. The fear is that these could see inflation tear higher once again. On that subject…??
?? Non-farm Payrolls ??
We’ll get the latest update on US Non-Farm Payrolls next Friday. For many years, the payroll release was the major monthly economic data point. But over the last 18 months or so, inflation data trumped jobs. However, given the fall in inflation over the past year, driven to a large extent by the Fed’s aggressive rate hikes since last March, payrolls are back in the spotlight. And the reason for this is tied to the US central bank, which has expressed surprise, and concern, that, despite hiking rates from below 0.25% in March 2022, to an upper limit of 5.50% now, unemployment continues to hover around 50-year lows. The trouble is that wage demands are building in this tight labour market. This looks certain to drive up inflation once again, putting pressure on the US Federal Reserve to raise rates further. Keep a close eye on Average Hourly Earnings which are released at the same time. Any significant increase in this data set could dent investor optimism.??
?? Chips with everything???
UK-based chip designer ARM is looking to go public for the second time in its life. The company designs chips found in all smartphones and a multitude of other everyday electrical devices. Currently in private hands, its owner, Japan’s Softbank, has announced an initial public offering (IPO) which is likely to take place in the first half of September. Details are sparse, but it’s believed the float could value ARM at $60/70 billion. Despite being based in Cambridge, Softbank wants to list on the US’s NASDAQ exchange, rather than the London Stock Exchange (LSE). This isn’t the first time that the LSE has lost out to US and it certainly won’t be the last. The City has lost its edge in several areas of expertise while the US offers far more favourable conditions for floating, including greater liquidity, a higher risk tolerance and acceptance of generous remuneration packages for C-suite members.??
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*Figures correct as of August 25th 2023.
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