BOE trims QT as expected, as Nvidia gives Intel a lift

As expected, the Bank of England held rates steady on  Thursday at 4%. They remained committed to a ‘careful and gradual’ reduction in interest rates, two members voted for a rate cut and quantitative tightening was loosened to £70bn this year, down from £100bn previously, the Bank will also slow the pace of long dated Gilt sales relative to other maturities.

The market impact has been mild. If some had been looking for a drop in 30-year UK Gilt yields, they will have been disappointed, The good news about looser QT had already been priced in, and the 30-year Gilt yield is up slightly on this news, although yields are down slightly at the shorter end of the curve. The pound has backed away from the highs of the day so far on this news, although it remains mid-pack compared to the rest of the G10.

BOE remains data dependent

Overall, the BOE remains data dependent, and for the 7 MPC members who vote to keep rates unchanged, the Bank is trying to  manage a fine balance between labour market weakening and sticky inflation. Unless there is a substantial weakening in demand, then inflation could remain elevated, and rates could be on hold for some time.

The 2 members who voted for a rate cut, Dhingra and Taylor, argued that elevated inflation was due to one off price charges for regulated utilities and increases in some food prices. They also justified their position by saying that wage growth is slowing. However, they failed to convince other members of the MPC to join them in cutting rates, and since the last meeting, there are fewer MPC members voting to cut rates. After voting to cut rates last month, Andrew Bailey voted for rates to remain unchanged. Although  it is one vote per member, the governor’s vote gives us an indication about sentiment at the MPC, and for now that suggests that the BOE is firmly on hold, and there is a high bar to lower interest rates.

US stocks set to surge to record highs

The market is likely to absorb the BOE news quickly, and the focus will shift to the US. US stocks futures suggest that the S&P 500 will surge at the open to fresh record highs. Intel shares are expected to open higher by more than 25% after news broke that Nvidia will invest $5bn in the beleaguered chip maker. Nvidia is also set to open higher later today.

The idea is that Intel and Nvidia will co-develop chips for PCs and data centres. There are mutual benefits to the tie up, Intel can use Nvidia’s graphics technology and AI computing power in future PC chips and it can provide its processors for data centres that will be built around Nvidia hardware, according to the latest details of the investment.

Nvidia rides to Intel’s rescue and the market likes it

Nvidia CEO Jensen Huang called the deal a fusion of two world-class platforms, and together the two US companies will lay the path for the future of computing. However, this shot in arm from Nvidia to Intel comes after the US government took a 10% stake in Intel last month. The fall from grace for Intel has been rapid, up until 2022 its revenue growth was stronger than Nvidia’s. The problem for the company is that it was slow to embrace the accelerator chip technology that has sent demand for Nvidia’s chips surging. The fact that Nvidia is now giving cash injections to Intel is a sign of the re-shuffled hierarchy in Silicon Valley. It is also a sign of an accelerated push into PC AI, which could be a huge revenue stream for both companies. Even if Intel needs handouts from its peers in Silicon Valley, investors like it and the Intel share price is set to breach the highs of the year so far once US stocks open.