Nvidia results and central bankers drive markets

The key drivers for markets this week are Nvidia’s results for last quarter, UK inflation data and a raft of central bank speakers, who could provide guidance about the timing of potential rate cuts for the major central banks. Ahead of these key events, European stock futures are broadly lower, and the dollar index is also weaker.

A high bar for Nvidia results

The bar is high for Nvidia, and the market is rallying into its earnings report on Wednesday. Its share price was higher by more than 2.5% on Monday, and futures markets are predicting a mildly positive open for US stocks later today. The narrative ahead of the Nvidia results is that they will determine the fate of the AI stock market boom and the next leg higher for US stocks. However, while we think Nvidia’s results are worth watching closely, the stock market rally has broadened out in recent weeks, so if Nvidia’s results are a mild disappointment, we think the market should be able to recover. To illustrate this point, in the past month, the semiconductor index is the third best performing sector in the S&P 500, higher by 20%. Instead, the power producers index and the consumer electronics index are the top two performing sectors in the S&P 500 in the past month, suggesting that the market is broadening out beyond tech.

Commodity prices surge in a month, as inflation fears escalate

One of the biggest risks to the possibility of rate cuts this year is the rise in various commodity prices. It’s easy to dismiss the increase and only focus on the record highs for gold and copper, however, the recent rise in commodity prices is more broad-based than metals. Commodities are rallying once again on Tuesday, the copper price is higher by another 2% on Tuesday morning, and the Nikel price is also higher by more than 2.5%. Gold is a touch lower, and it is currently trading at $2,415 per ounce. As we have mentioned, the key driver of gold demand this year has been central bank buying, ETFs have seen net outflows from gold funds. This suggests that fundamental factors, such as geopolitical issues and economic issues are driving the gold price higher. Although some key Fed members have pushed back on expectations about summer rate cut for the US, the fact that the Fed and others seem to have ruled out the prospect of rate hikes means that inflation is still a threat for the global economy. Gold is the ultimate inflation hedge, and this quality is also driving the gold price higher.

RBA worries about inflation could spread to other central banks

The one central bank that is willing to put the prospect of rate hikes back on the table is the Reserve Bank of Australia. RBA meeting minutes released on Tuesday, reiterated the bank’s main commitment is restoring price stability, and further tightening may be necessary to restore stable inflation levels, Q1 CPI in Australia was 3.6%, above the target rate. The market is pricing in a mere 15 basis points of cuts from the RBA for year, and we could see a further recalibration in Australian rate cut expectations later this week. So far, the Aussie dollar has not been too impacted by the more hawkish than expected RBA minutes, as the market focuses on the USD, after a spate of Fed speakers in recent days.

Price pressures could be building

The RBA doesn’t necessarily lead the pack when it comes to global central banks, however, it is a warning sign that price pressures remain, and central banks need to be wary of future inflation risks. Commodity prices have surged over the past month, for example wheat prices are higher by 24%, gold is up by 4%, silver is higher by 16%, copper is higher by 10%, US Nat Gas futures have surged by more than 50%, although oil prices have moderated in the past few weeks. While commodity prices are only one aspect of the inflation basket, they are an important component of inflation, so it will be interesting if ECB, BOE and Fed members reference rising commodity prices as a reason for caution when it comes to rate cuts.

Central bank speak in focus

This adds to the focus on today’s central bank speakers, including Andrew Bailey, the ECB’s Christine Lagarde, and the Fed’s Bostic, Williams and Waller.  Ahead of these speeches, there is currently a 96% chance of a rate cut from the ECB next month, a 52% chance of a June rate cut from the BOE, and a 50% chance of a September rate cut from the Fed.

Succession plans ahead for US’s biggest bank

JP Morgan’s share price will also be in focus on Tuesday. It was the 7^th worst performing stock on the S&P 500 on Monday after JPM’s investor day focused minds on life after CEO Jaime Dimon retires. He refused to say that he will be at the bank for the next 5 years and instead said that succession plans are well under way. Financial markets don’t like change and they don’t like uncertainty. We think that the news that Dimon is considering his future will have a short-term negative impact on the stock price, due to his huge influence in the US banking sector.  However, Monday’s sharp decline in the share price is a reminder that succession plans at the US bank need to be handled carefully and the new leader needs to be signposted well in advance of Dimon leaving JPM.