Underestimating
Stocks in the US saw a steep sell-off on Monday after President Donald Trump's confirmation of new tariffs, fueling fears about the economy.
The S&P 500 dropped 1.7%, its worst day since Dec, the Nasdaq 100 lost 2.6%, and the Dow fell 649 points.
Additionally, new tariffs, including a 25% tax on imports from Mexico and Canada and a 10% levy on Chinese goods, will take effect tomorrow.
The tech sector took the hardest hit, with Nvidia plunging 8.7% amid an investigation into whether its chips were illegally routed through Malaysia to avoid US export restrictions on China.
Broadcom dropped 6% ahead of its earnings report.
Nvidia is down 13% since earnings day.
Going into that earnings report we talked about the likelihood that it would serve as a catalyst for some broader stock market weakness (a correction).
It looks like we're getting it.
As we discussed, for Nvidia shares, a retracement to the day of the stock-split-announcement (May 22, 2024) would be about $95. It closed yesterday at $114.
As for the AI-theme-heavy Nasdaq, here's the chart we looked at last week. Remember, a test of this trendline that represents the doubling of the Nasdaq, driven by the "ChatGPT moment," would be an 11%-12% correction. It's down 8% so far.
And this all comes as the interest rate market has been flashing warning signals, with the 55 basis point collapse in the 10-year bond yield over just a three-week period. And it's reflected in this chart we look at on Friday. This gauge of inflation expectations has plunged.
So, just as Wall Street and the Fed have been handwringing about a reacceleration in inflation, the bond market, and now the stock market, may be telling us that disinflationary pressures are stronger.
Remember, the Fed is still holding rates 180 basis points above the rate of inflation (PCE), which means they are putting downward pressure on prices and the economy.
With that, the latest two readings on the Atlanta Fed's GDP model have the economy tracking at a 2.8% contraction in the first quarter (the green line).
Add to this, we get the February jobs report on Friday. The BLS numbers cover up to just the 12th of the prior month, so most of the government job cuts thus far should show up in the next report, in early April.
But a labour market shock is coming, and it will be (if it isn't already) a drag on growth and price pressures (i.e. disinflationary).
Who is on high alert to "unexpected weakness" in the labour market?
The Fed.
That said, the market is now pricing in a rate cut for June, a cut for September and a chance of a third by year end. Given the dynamics we've discussed above, the market seems to be underestimating the chance of a cut this month (March 19).
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