Tighter Still

• The three major averages in the US swung around the flatline on Thursday, after both the S&P 500 and the Nasdaq rallied to new record highs the day before, with traders awaiting further catalysts to assess the monetary policy outlook.

• Initial jobless claims rose more than anticipated last week, and labour costs in Q1 were revised lower, an additional sign the Fed has room to cut interest rates this year.

• Real estate, materials, utilities and health were the worst performing sectors while tech and consumer discretionary outperformed.

• On the corporate front, shares of Lululemon jumped more than 4% after upbeat earnings.

• Megacaps were also mixed, with Microsoft trading little changed, while Amazon (0.7%), Meta (0.1%) and Alphabet (0.6%) were in the green.

Yesterday morning, the European Central Bank became the fourth G10 central bank to cut rates. Let's talk about the nuance Lagarde (ECB President) used to insist that they are still in the inflation fighting stance (headline below).

In September, euro zone inflation was running 2.9%. The ECB's policy rate was 4%. That's 110 basis points ABOVE the inflation rate (i.e. the "real" interest rate).

Today, AFTER the cut, the real rate is 115 basis points. So, as she said, policy is tighter today, even after the rate cut.

This is what we've been discussing along the path of the fall in inflation in the U.S. Once the annual rate-of-change in prices fell below the Fed's policy rate (effective rate of 5.33%), the Fed's stance has only become tighter and tighter as inflation has declined. Here's what that looks like …

So, the Fed is currently 268 basis points above the rate of inflation. That's historically very restrictive monetary policy. Similar to the ECB, they could cut rates right now, and still be left with a tighter policy stance than they had last October (which, coincidentally, is when Jay Powell signalled the end of the tightening cycle).

As you can also see, the current real interest rate is more than 200 basis points higher than where the Fed projects the longer term real Fed Funds Rate ("the Fed's Projected Real Neutral Rate" … where they deem the rate to be neutral - not stimulative, nor restrictive).

Bottom line: The Fed could make the same case Lagarde made, cutting rates but continuing the inflation fighting stance - given that real rates would continue to be very restrictive. Lagarde may be the Fed's test subject on a way to start the easing cycle, without stoking much excitement in markets, consumers and businesses (which could translate into renewed inflation pressures).

Let's talk about Nvidia. Nvidia will split at the close of business today (shareholders get 10 shares for every 1 share owned). As we discussed following the Nvidia earnings a couple of weeks ago, this split looks a lot like the 2014 Apple split.

Apple announced a 7-for-1 split when the stock was in the mid $500s, and ran up to around $700 by the time of the split. Nvidia has nearly replicated the pre-split premium (just shy of 30% added since the announcement).

As we also discussed, as with Apple, Nvidia's post-split lower share price creates an opportunity for inclusion into the Dow (DJIA). That should turn market attention to the Dow, which has been lagging the Nasdaq. Moreover, the Nasdaq has more than doubled the performance of the DJIA since the "Nvidia moment" in May of last year.

We get the May jobs report this morning. Remember, the Fed has told us they are watching the job market "carefully" for "cracks" as a condition to start the easing cycle.