Skip to main content

Three "i": Inflation, Interest (Rates) and (Artificial) Intelligence

First - Happy Independence Day for India (Aug 15) and Pakistan (Aug 14).

Last week was historical week for Indian Film industry which collected over $100 M on box-office and brought in millions of people to movie theaters with releases like Gadar2, OMG2 and Jailer. I happen to see all three of them. They are decent crowd-pleasers - the main stars in all of them are over 55. In particular I liked OMG2 in the way a difficult topic such as need for sex-education in Indian schools was presented. Pankaj Tripathi's performance is outstanding. 

Now onto three "i" factors 

The usual pattern of markets going downwards or sideways is on display during the dog days of summer...The earnings season is about to wrap up and by most accounts earnings were quite ok as compared to expectations. The companies which beat got rewarded and companies which miss got penalized...nothing new. But despite initial reactions, many stocks gave up all their days due to continued upward march of interest rates and due to fears that Fed fight against inflation may not be over..Next week would be key to two "i" factors which could decide course of markets for rest of year. Let's look at these.

Inflation:

Latest CPI and PPI readings were good in terms of inflation trends. Headline numbers are below 4 and heading downwards albeit slowly. Compared to headline numbers above 8% last summer, this is great progress. Many factors helping good inflation trends...oil prices are down (even though recently they have been creeping up), labor costs are stabilizing (despite historically low unemployment), cost of goods including perishables (like eggs) are down. The only stubborn factor is cost of shelter (NYC apt rents are historically high). Given all these factors inflation is heading in right direction but would get stuck around 3% for long time giving enough ammunition to fed to be hawkish (and repair its credibility which it lost last year with statements like "inflation is transitory")

Interest (Rates):

10-year treasury rates are near 15 year high and inching towards 4.3. That means bond markets are giving clear indications that rates are going to be higher for longer. Fed meeting minutes also were hawkish. Next week Fed chairman Powell is going to speak at yearly conference at Jackson Hole. Last year he used this forum to start the campaign of very aggresive rate hikes. Would he use this forum to give indication that Fed is near end in the campaign (kind of "Mission Accomplished") or keep the hawkish tone that Fed has more work to do...IMO Powell will say that we have more work to do but future rate hikes would be data dependent...that means it would be back to monthly CPI/PPI numbers and "all clear" signals markets are expecting would not be given. So expect volatility based on every statement Fed officials make and monthly CPI/PPI/Employment reports.

(Artificial) Intelligence:

Next week's Nvidia's earnings call may be one of the most important and eagerly awaited call for any company, tech industry and may be all of the markets. Nvidia blew past expectations in last earnings call by raising revenue estimates by more than 50% ($11B vs expectations of $7B) which triggered the late spring/early summer rally and made Nvidia newest trillion $ market cap company. The expectations are even higher and markets could be expecting Nvidia to blow past even $11B...(whisper numbers may be closer to $12.5B) and raise forecasts for the rest of the year significantly. They are expecting company to produce $15B quarter in 2024/2025. That would be almost 4 times as what company was doing just 3-4 years back.  If Nvidia is able to deliver these astronomical expectations, it would lift all tech companies with confidence that AI is still in the early cycles (like Internet in 95-96) and not just another fad/bubble (like crypto). 

So get ready for some interesting moves in the markets from now till Labor Day before two of the worst months for markets (Sept and Oct) start...Watch out for potential "black swan" event. "China's Lehman Moment" given precarious situation of its real estate sector and self-induced pains on its tech industry. But that topic for another day.

In the meantime, Enjoy rest of summer days and Labor Day!

/Shyam




Comments

Post a Comment

Popular posts from this blog

Clicks to Tokens: Will 2026 Echo 1998's Boom or 2000's Bust?

My "blogging" was in hibernation last 8 months due to my self-imposed restraint given the environment as well as built-in inertia to get started despite so many interesting events and markets reaching all time highs after taking a big dump around "Liberation Day" in Apr...Around that time I had the blog ready that it would be repeat of Mar/Apr 2020 panic and recovery during onset of Covid Pandemic. The hunch happened to be correct and I was glad that I could keep and take some positions which I am still holding especially around AI theme. But that was then...as 2025 is about to wrap up in 10+ weeks, let's look at what's in store for rest of 2025 and 2026. And what's better time than to start writing again just before one of the most important week on the calendar with multiple key events coming up next week... Fed meeting to decide the course of interest rates - it's almost guaranteed that Fed will cut rates by 25 basis points (2nd time in 2025) and...
Post a Comment
Read more

2026: The Year of Convergence – Melt-up, Moonshots, or Mid-cycle Correction?

Happy New Year! After another period of self-imposed hibernation from the blog—partly due to the festivals, travel, intertia and partly to watch the dust settle on a chaotic 2025—I decided to use the quiet of this New Year’s morning to finally reboot.  Looking back at my October post,  “Clicks to Tokens,”  the hunch about the AI theme held firm. We spent much of 2025 debating whether we were in 1998 or 2000. As we enter 2026, the answer seems to be "neither and both." We have the roaring optimism of the 1920s fueled by "Silicon Spirits," but with the high-speed volatility of the 2020s. So, as the calendar flips, what is in store for 2026? Markets may experience melt-up (S&P touching 8000),  with some moonshots (like SpaceX and OpenAI) IPOs or even see mid-cycle correction bringing down S&P to 6000. That's a wide range and will be decided by Four R's... Here are my thoughts on the " Four R’s ":  Rates, Robots, Rotations, and Real Assets. 1. ...
Post a Comment
Read more

And the Oscar goes to...

It's Oscar Sunday and time for predictions for few categories - before I digress into talking about drama in DC or markets.  First of all, I want to recognize the damage LA fires have done to the beloved areas of Los Angeles and impacted families across all spectrums. My heart goes out to them and wish them recovery and rebuilding of their lives... This year's Oscar nominees and post nomination period had been interesting to say the least. Due to this, the field is wide open in almost all categories and that's what makes prediction game so interesting. Just to set expectations, I would consider a win if I get even 50% predictions correct given the dynamics of nominees this year. So here are my predictions - "And the Oscar goes to..." Best Picture - Anora (surprise could be "The Brutalist") Best Director - Sean Baker for "Anora" (Surprise could be Brady Corbet for "The Brutalist") Best Actor - Adrien Brody for "The Brutalist"...
Post a Comment
Read more