What to know today

  • Inflation is hot because the economy is healthy.
  • AMD is rolling with AI PCs.
  • Bet on the US consumer.

Powell Rocks, Rolls Markets

The old Deadhead struck a seemingly discordant tune on Tuesday.

Stocks were all over the place and yields surged on Tuesday in a topsy-turvy trading session made that way by Federal Reserve Chair Jerome Powell. 

“The more recent data show solid growth and continued strength in the labor market,” the most interesting central banker in the world said during a moderated discussion with Bank of Canada Governor Tiff Macklem at the Washington Forum on the Canadian Economy.

Those same data reveal, however, “a lack of further progress so far this year on returning to our 2 percent inflation goal.” In other words, the economy is too strong to cut rates right now.

“The recent data have clearly not given us greater confidence, and instead indicate that it’s likely to take longer than expected to achieve that confidence.

“If higher inflation does persist,” Powell said, “we can maintain the current level of restriction for as long as needed.”

There’s slim to no chance of a rate cut in May or June, though the futures market is pricing in roughly even odds of a quarter-point move in July.

Futures markets are pricing in approximately 40 basis points worth of rate cuts by the Federal Reserve this year.

There is a hard-and-fast contrarian out there, though, State Street Global Advisors, which reiterated its forecast that the Fed will begin its easing cycle well ahead of the November presidential election.

Chief investment officer Lori Heinel also noted that policy works with a long lag and that the quality of recent incoming data has been low. “The overall inflation picture supports a cut,” Heinel said.

Core services inflation continues to trend well above the long-term historical average.

As former Fed economist Claudia Sahm wrote on Tuesday, “The bad news is not as bad as the headlines.”

Sahm noted first that the Personal Consumption Expenditures Price Index for March is likely to look a lot better than the Consumer Price Index. Core PCE is the Fed’s preferred inflation gauge.

Sahm also notes that “what’s left in the fight against inflation is far more concentrated than in 2022” and that “some of what’s being bemoaned as ‘sticky’ inflation by commentators is some inflation settling in at sustainable levels.”

Sahm, now the chief economist for New Century Advisors, also underscored that the inflation problem has narrowed to areas including shelter and auto insurance where the Fed’s tools are not suited to the challenge.

The risk the Fed runs here is that holding rates at the present level or raising them puts the economy into recession. That would surely reduce demand in areas where monetary policy does have an impact and reduce overall inflation toward the 2 percent target.

But, as Sahm emphasizes, hawkishness may not solve the problem as it now stands, and it could create new ones.

deep dive

AMD Gets an AI Bounce

Competition within the revolution is heating up.

Advanced Micro Devices $AMD has been overshadowed by Nvidia $NVDA for about a year and a half now.

But the stock outperformed its high-profile rival on Tuesday after it announced a collaboration with Taiwan Semiconductor Manufacturing Company $TSMC to fabricate new processors to equip desktop and laptop PCs with more AI processing capability.

The introduction of the Ryzen PRO 8040 Series x86 processors for business laptops and mobile devices and the Ryzen PRO 8000 Series desktop processor allows AMD to lay claim to being the first chipmaker with professional central processing units equipped with neural processing units for laptops and workstations.

NVDA and Intel $INTC too will not stand idly by and let AMD seize a market that all three expect to ramp up in the second half of the year.

Advanced Micro Devices $AMD has lagged Nvidia $NVDA since the fourth quarter of 2022, but on Tuesday it outperformed the recent market darling.

In February, Gartner forecast that original equipment manufacturers would ship 54.5 million AI PCs in 2024, more than double the 24 million shipped in 2023. AI PC shipments will more than double again in 2025, to 116 million units.

During a chat at SXSW last month AMD CEO Lisa Su established her bona fides as an AI champion as vocal as NVDA CEO Jensen Huang and signaled her intention to make her own revolution in the space.

Su, tailoring her talk to the crowd in Austin, emaphasized AI PC and how artificial intelligence can help creatives in their work.

In addition to incorporating the technology into the hardware it ships, AMD is using AI to design better chips, to build better software, and to increase productivity, Su said.

deep dive |
April 17, 2024

AMD Gets an AI Bounce


Such a Thing as Good Credit

Visa $V and Mastercard $MA are well-positioned for growth.

The underlying strength of the US economy is revealed in bullish dispatches From the Research Desk on credit card stocks.

Federal Reserve data show that total credit card balances grew by $50 billion during the fourth quarter to $1.13 trillion, a record high. Still, consumers continue to spend.

And that behavior is good for Visa $V and Mastercard $MA.

According to TD Cowen analyst Bryan Bergin, both companies are well-positioned for the digitization of consumer payments and have staked out new value-added services and revenue streams that should support “sustainable double-digit growth.”

Threats from emerging payment methods as well as policymakers and regulators are manageable, Bergin notes, and both stocks boast offensive as well as defensive characteristics.

Retail sales growth for the first quarter was healthy across most categories.

Consumer payments should support a long-term, stable growth floor in the mid- to high single-digits range for MA. Bergin has a one-year price target of $545 on the stock, approximately 16 percent upside from Tuesday’s closing price.

Growth in its addressable market supports a sustainable net revenue growth rate in the high single-digit-to- low double-digit range and earnings growth in the low double-digit-to-low-teens range for V.

Bergin has a one-year price target of $320 on V, which represents about 18 percent upside from Tuesday’s closing price.

We’re still enjoying what looks like an income-driven cycle, with disposable income and employee compensation both comfortably above inflation as of the end of March.

But we will keep an eye on more recent data suggesting an uptick in credit card delinquency rates, an increase in the number of card-holders making only the minimum payment, and rising revolving balances.

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