27th August - Sticky Inflation Ahead Of Jackson Hole
The two big news events yesterday were the PCE release and Nvidia earnings. PCE was mixed, with headline PCE y/y at 0.2% against an expected 0.1% and PCE m/m at 3.7% against an expected 3.6%. Core PCE by comparison was 0.2% m/m and 3.3% y/y, both in line with expectations. The monthly core that is most closely watched by the Fed stayed in line with expectations. We also saw US Prelim GDP q/q land as predicted at 1.5% as the US economy held steady.
The mildly hot inflation print did not have a huge effect on markets overall, with the key core PCE staying as expected. It gives the FOMC backing to hold rates for another month. Sticky rather than accelerating inflation does not need immediate action.
The next big news was Nvidia, which beat expectations but also had some interesting nuances to consider. The earnings themselves beat expectations, but more importantly, so did the guidance. Q3 revenue was guided to be $108 billion against an expected $104.2 billion, just shy of $4 billion above consensus. This assumes no data center sales to China, which means this higher forecast is a conservative one and could have been higher. The fact they are projecting higher than expected earnings without factoring in the second-largest economy in the world is a significant point to note. The other thing to note, and possibly one of the most important, is that Nvidia CFO Colette Kress has said that capex amongst the top 5 hyperscalers in the AI market is expected to increase to $1.3 trillion next year, up from $800 billion in 2026. This is significant if it proves correct, as we have consistently seen this year that these hyperscalers can beat earnings expectations but see stock price falls if capex projections are higher than expected. The question now becomes, will this trend continue if we see continued capex expansion going into 2027?
Forex
The dollar firmed modestly on the back of the PCE release, which is broadly what you would expect from a mildly hot inflation print that gives the Fed cover to hold. EUR/USD fell 0.19% to 1.1653 and USD/JPY rose slightly to 159.29, while the Aussie was the only major to gain, continuing the run it has been on since Tuesday's CPI and closing up 0.15% at 0.7171 before pushing on again this morning to 0.7183.
The one that stands out is sterling, which fell 0.38% to 1.3595 and was comfortably the weakest currency on the board. It was not just a dollar story either, as GBP lost ground against the euro and the yen too, with EUR/GBP rising around 0.20% to 0.8572. What makes this notable is that there was no obvious UK catalyst behind it. There was no data of note, no political development, nothing to point at. That leaves positioning as the most likely explanation, and it is the second time this month that the pound has quietly underperformed without an identifiable driver behind it. One to keep an eye on rather than draw conclusions from at this stage, but if it happens a third time it starts to look like a trend rather than noise.
Yields were the more interesting story. They initially fell on the monthly PCE readings before ticking back up as the market digested the higher than expected annual figures, and finished the day broadly unchanged. That is the first genuinely quiet session the bond market has had since the Treasury announced its buyback programme, and it comes immediately after Tuesday, when the 10-year lost almost 8 basis points on the news that the Treasury could fund those buybacks from its near $1 trillion General Account. So one significant move followed by one day of sitting still, which is hardly enough to call this settled. Whether the calm lasts through Warsh tomorrow is another matter entirely.
Indices
All three indices closed slightly higher yesterday ahead of the Nvidia release, with the market seemingly treading water before the most consequential earnings report of the week. Nvidia itself fell 1.28% during the session, its eighth losing day in nine, and the options market was pricing a $280 billion swing in its market cap on the result. That gives you a sense of the uncertainty going in.
Then the numbers landed and the stock jumped in after hours trading. Revenue came in at $96.2 billion against a consensus of around $92.4 billion, adjusted EPS at $2.22 against $2.08 expected, and gross margin held at 75% with no compression at all. Data centre revenue was $89 billion, up 18% sequentially, with hyperscale revenue at $49 billion against the $43.5 billion expected. Alongside the results came confirmation that Amazon Web Services will buy two million Nvidia GPUs, which rather undermines the argument that the hyperscalers are close to tapping out.
Jensen Huang also gave the most direct defence of AI spending we have heard from anyone, telling the earnings call that "the only regret that I have is that I didn't invest more and sooner." Set that against Cisco's warning a fortnight ago that AI demand was not there, and we now have the two sides of this argument stated plainly by the people best placed to know. Both cannot be right. Huang is obviously talking his own book, and that needs weighing accordingly, but the numbers do rather support him.
The question I keep coming back to is the one raised by that $1.3 trillion capex figure. If the top five hyperscalers really do increase spending by more than 60% next year, that is fantastic news for Nvidia and the rest of the supplier chain, because that spending is their revenue. But every one of those hyperscalers is going to have to report it. Meta fell 6% for raising capex to $130 billion, and Alphabet fell 7% for going to $205 billion. If that pattern holds into 2027, the divide between the companies doing the spending and the companies receiving it does not close, it gets considerably wider.
Precious Metals
Gold fell around 1.4% yesterday to close near $4,600, with silver down just under 1% to close around $67.50. The mechanism here is worth being straight about. Metals fell on a sticky inflation print, which is the conventional rate channel working exactly as it always has. Hot inflation means the Fed stays hawkish for longer, and that is a headwind for assets that do not pay you anything to hold them. After a couple of sessions where falling yields did not lift gold, we have now had one where sticky inflation knocked it back.
I think that complicates the confidence trade narrative slightly, and it is worth acknowledging rather than glossing over. Both channels appear to be live at the moment. The loss of confidence in US debt is providing a floor, which is why gold is holding above $4,600 rather than correcting properly after the run it has been on. But the rate channel is still governing the day to day moves. Gold is not immune to the Fed, it is simply no longer only about the Fed, and both of those things can be true at the same time.
That does mean the retracement I have been waiting for has not yet materialised. A 1.5% fall is not the entry point I have been holding out for. Everything now rests on Warsh tomorrow. A hawkish tone would give the metals a genuine test, and would be the most likely source of the pullback I want to see. A dovish one and this market simply carries on without me.
Today's Market Drivers
Jackson Hole begins - The symposium runs through Saturday, with Warsh speaking tomorrow at 3pm UK being the week's main event.
US jobless claims (1:30pm UK) - Forecast at 208K against 206K.
The Nvidia read-through - Watch whether the after-hours jump holds through the cash session and whether it lifts the wider semiconductor complex, which has been the weakest part of the market for six weeks.
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