The market’s record-breaking surge led to a widely-anticipated pause last Thursday and Friday after Trump’s tough talk on Ukraine and tariffs, and after the Fed released their minutes last Wednesday of the January Federal Open Market Committee (FOMC) meeting, revealing that “the vast majority” of FOMC members judged that the risks to their dual-mandate objectives were “roughly in balance.”
However, the details of those Fed minutes revealed that “a couple” of FOMC members are thinking much more about upside risks to inflation than downside risks to job growth. Virtually all FOMC members want to wait for “further progress on inflation” before easing policy rates again. This essentially means that the Fed is warning the Trump Administration that high or long-lasting tariffs may delay further easing. The Fed may continue to ease further, but later in the year. They may keep rates unchanged in their March and May meetings, but by June, they should be open to rate cuts, especially if global yields are falling.
Nvidia usually marks the final big announcement of earnings season. Last Thursday, Nvidia CEO Jensen Huang said in a virtual event that investors had misinterpreted DeepSeek’s January 27 announcement of their “advancements.” Specifically, Huang said, “Their inference was, you ask an AI a question, and it instantly gives you an answer,” but Jensen said, “Obviously, that paradigm is wrong,” explaining that “Pre-training is important,” but post-training is the “most important part of intelligence,” as that is “where you learn to solve problems.” Obviously, Nvidia has the greatest experience doing this.
Here are the most important market news items and what this news means:
- This week, Super Micro Computer (SMCI) and Nvidia (NVDA) are expected to set the tone for the stock market. In the wake of the news that the DeepSeek app was crashing and had cybersecurity problem, I am expecting that Nvidia will lead AI-related stocks and the overall stock market higher.
- The German election is over. In the event that incoming German Chancellor Merz does not include the AfD in its ruling coalition, Germany will become dysfunctional like France, where President Macron represents a minority and cannot work with Marine Le Pen, whose National Party controls Parliament. Furthermore, the criticism from Vice President J.D. Vance that Germany is suppressing democracy, and the will of the people may intensify and be repeated by President Trump. As a result, Germany is now under an international spotlight, and it will be interesting if incoming Chancellor Merz will ignore his previous pledge of not working with the AfD party and include them in his ruling coalition.
- I suspect that if incoming Chancellor Merz does not do what the Trump Administration wants, the U.S. can retaliate with tariffs as well as a cut in military spending. Merz said, “It should be a priority to strengthen Europe as fast as possible so that we gradually achieve independence from the U.S.” The incoming German Chancellor added, “It’s clear that the Americans, at least this American administration, are largely indifferent to the fate of Europe.” Ironically, Merz will likely have to boost Germany’s military spending if they annoy the Trump Administration.
- Just like President Trump wants German companies to move their operations to the U.S. to avoid higher tariffs, he is also pressuring U.S. companies to onshore their operations. As an example, Apple announced this week that it is investing $500 billion in the U.S. over the next four years, which will represent its largest domestic investment. Trump has threatened an additional 10% tax on items imported from China, where Apple builds the vast majority of iPhones and other products. However, Trump has traded investment in the U.S. for tariff relief in the past, so it appears that Apple is doing its best to appease the Trump Administration.
- The Conference Board on Tuesday announced that its consumer confidence index declined to 98.3 in February, down from 105.3 in January. This was the third straight monthly decline and the largest monthly decline since August 2021, so clearly, many consumers are nervous. Obviously, a pessimistic consumer will weigh on economists’ GDP estimates. I should add that consumers usually cheer up in the spring as the weather improves, so I expect consumer confidence to improve in the upcoming months.
- We will get PCE for January this Friday, which will swing expectations for Fed sentiment. Currently, the first Fed meeting with a market bet for a cut is in June. It’s important to remember that if there is true economic weakness, the Fed has a lot of room to cut, which reduces systemic risk. I stand by my statement that I am expecting up to four key interest rate cuts this year due to the global collapse in interest rates.
Overall, earnings have been strong, and double-digit forecasts for the year remain intact. The AI theme is alive and well. It is hard to be too concerned when after the worst week in months the S&P is only 2.4% from all-time highs. The trend remains positive, but NVIDIA could have a material impact in the short term, in either direction.
