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Cool core CPI gives Fed more room to ease. (0:15) Wells Fargo, Citi pop after earnings. (2:56) Nvidia announces Quantum Day. (4:41)
This is an abridged transcript of the podcast.
Some good news for doves finally arrived as the December consumer price index showed some core retail disinflation.
Market reaction was quick and decisive, with stocks jumping and Treasury yields tumbling. And the anticipated first Fed cut this year was pulled forward to July from September.
But the numbers weren’t exactly the nails in the inflation coffin. Headline CPI rose as expected, up 0.4% last month, with the annual rate moving up to 2.9%. Core CPI rose 0.2%, lower than the 0.3% forecast, and the annual rate unexpectedly ticked down to 3.2%.
SA analyst Justin Purohit says the figures “appear consistent with the cautious stance noted by Chairman Jerome Powell and policymakers like Tom Barkman” and “strengthens the case for a more gradual pace of rate reductions. This suggests that any cuts are more likely to occur in the second half of the year, rather than the earlier timeline some observers have anticipated.”
Wells Fargo economists say the “progress in the fight against inflation has seemed to effectively stall in recent months,” with the core CPI 3-month annual rate of 3.3% little different than the 6-month and 12-month rates of 3.2% “as deflation in core goods has faded since the summer and offset the frustratingly slow pace of services disinflation.”
Adding to that more resilient labor market data, they are lowering their Fed expectations to two 25 bps cuts this year from three, in September and December.
Purohit added that the California wildfires could contribute to an uptick in inflation in 2025, driven by factors such as higher insurance costs and recovery efforts.
So why the big market reaction? It seems the market is as data dependent as the Fed says it is.
The S&P (SP500) and Dow (DJI) are up +1.5%, and the Nasdaq (COMP.IND) is up +2%. And the 10-year Treasury yield (US10Y) is down near 4.65% after pushing up against 4.80% just a session before.
On the equity side, it’s likely relief that macro factors won’t be derailing the still-strong AI trade anytime soon. For Treasuries, such a sizable tumble in yields suggests traders outkicked their coverage on bets for higher rates.
At the end of last week, Reuters reported that substantial positions were building up in the March contract for 10-year Treasury futures put options, with strikes in the 105 to 106 price levels. Those bets were for the 10-year hitting between 4.75% and 5.00%.
Skyler Weinand, chief investment officer at Regan Capital, expects the 10-year to resume its ascension.
“We believe the 10-year Treasury yield can reach between 5.25% and 5.50% in the next 12 months. While this may create some pain for fixed income investors, it will create a generously positive yield curve and be a boon for years to come in some sectors like banks, which thrive off of a steep yield curve,” he said.
Among active stocks, it’s all about the big bank earnings. Overall, investors were impressed, and the S&P Bank ETF (KBE) is up +2%.
With the U.S. economy humming along, JPMorgan Chase (JPM) turned in stronger-than-expected Q4 earnings, with net interest income staying flat and Q3 and investment banking and capital markets-related revenue strengthening.
The company introduced guidance for 2025 net interest income, excluding markets, of about $90 billion as balance sheet growth partially offsets lower rates. Overall, JPM expects NII of about $94 billion, market dependent. That compares with the Visible Alpha consensus of $90.6 billion and with the $92.6 billion reported for 2024.
Citigroup (C) gained after posting better-than-expected Q4 results and approving a $20 billion stock buyback program.
Full-year 2025 net interest income, ex-markets, is expected to be up modestly from the $47.1 billion reported for 2024.
Goldman Sachs (GS) posted strong Q4 and full-year earnings, bolstered by solid net interest income, rebounding investment banking fees, and robust growth in its asset and wealth management businesses.
CEO David Solomon said: “I’m encouraged that we have met or exceeded almost all of the targets we set in our strategy to grow the firm five years ago, and as a result, have both grown our revenues by nearly 50% and enhanced the durability of our franchise.”
And Wells Fargo (WFC) turned in mixed Q4 results, with revenue of $20.4 billion missing the consensus of $20.6 billion. But it expects net interest income to rise and noninterest expenses to decline in 2025.
The bank expects 2025 net interest income to rise ~1%-3% from 2024’s $47.4 billion. That implies a range of $47.7 billion to $47.8 billion.
In other news of note. Nvidia (NVDA) says its annual GTC event will include its first-ever Quantum Day.
The annual event, where Nvidia has announced its Hopper and Blackwell line of products in the past, will see CEO Jensen Huang discuss a myriad of quantum-related topics, including “what’s possible and available now in quantum computing, and where quantum technologies are headed.”
Nvidia also said it will discuss the latest quantum computing news and “advances (for) shortening the timeline to useful applications.”
Representatives from D-Wave (QBTS), IonQ (IONQ), Rigetti (RGTI), and several other quantum computing companies will be in attendance.
And in the Wall Street Research Corner. Wells Fargo strategist Chris Harvey highlights the iShares MSCI USA Momentum Factor ETF (MTUM), which “is coming off one of its best years on both relative and absolute bases but remains in oversold territory.”
That means a further near-term bounce is possible.
The ETF is up 30.76% from a year ago, down 3.12% from a month ago, but up 0.64% from the past five days. Its largest sector continues to be technology at 27.36%, followed by financials at 21.44% and consumer defensives at 12.38%.
Its top holdings are Broadcom (AVGO), Walmart (WMT), JPMorgan Chase (JPM), Nvidia (NVDA), Costco (COST), AbbVie (ABBV), Oracle (ORCL), Philip Morris (PM), Intuitive Surgical (ISRG), and GE Vernova (GEV).
MTUM has a Seeking Alpha Quant Buy rating of 4.20 out of 5.
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