Hoping for a rate cut before Christmas? Don't hold your breath

Pressure is mounting on the Reserve Bank of Australia board to reduce the cash rate when it meets next week following data released by the Australian Bureau of Statistics yesterday.

ABS figures showed inflation fell by one percent to 2.8 percent in the September quarter, down from 3.8 percent in June. This places it in the RBA’s stated target range of 2 to 3 percent.

Mortgage holders will be waiting expectantly to see if the RBA board decides to cut the official interest rate from 4.35 percent as mortgage stress impacts an increasing number of Australians.

A recent survey by comparison site, Finder, revealed that up to four in 10 mortgage holders were contributing 40 percent or more of their income to repayments. Mortgage stress is considered to have kicked in once the borrower is contributing one third or more of their income.

Following RBA board meetings in recent months, Governor Michele Bullock has stressed the board’s commitment to driving down inflation. With yesterday’s inflation figures better than anticipated, expectations of a drop have risen. However, despite inflation sitting at the lowest level since March 2021, economists have cautioned that a cut before Christmas is unlikely.

“Short of substantially higher unemployment, lower underlying inflation or an external shock, the RBA is likely to remain on hold in the months ahead as the board look to sustainably return inflation to the target range,” REA Group senior economist Eleanor Creagh said.

The cautionary approach is due in part to the underlying reasons for the decline in figures, including Federal Government rebates on energy, which were a temporary measure to offset cost of living pressures.

Following the board’s last meeting in September, Ms Bullock was careful not to raise hopes of an interest rate cut before next year.

“If tomorrow we get an inflation number with a two in front of it, so it’s back in the band, that doesn’t mean that we’ve got inflation under control,” she said.

In recent months, the United States and Canada have both cut their cash rates by half a percentage point, prompting calls to do similar in Australia.

Chip makers are fighting to assure investors that the artificial-intelligence boom is racing forward. Wall Street might not believe it until Nvidia’s NVDA -0.98%decrease; down pointing triangle Jensen Huang says so.

When Huang steps up to the mic for his company’s earnings call Wednesday, he will have the world’s attention. What he says about Nvidia’s present will preview the future of AI, dictate the path forward for a tech-crazed stock market and influence an American economy increasingly tethered to hopes that the boom won’t go bust.

The $5 trillion chip maker has provided the key building blocks for AI since the launch of ChatGPT in 2022 set off a race for dominance among OpenAI, Anthropic and established Silicon Valley giants. Now, as Nvidia backstops sprawling data-center projects and an exotic money pipeline to boost chip demand, the company’s influence is arguably bigger than ever.

But there are signs of trouble ahead. Political pushback to AI is growing. A bond selloff propelled borrowing costs to their highest levels in years. The hyperscalers that include some of Nvidia’s key customers—once cash-printing machines—are relying more on debt. OpenAI recently told investors its revenue rose by a tepid 18% in the second quarter while its losses deepened.

Nvidia is increasingly stepping in to shore up potential weak points across the market. Earlier this month, the company teamed up with six of Wall Street’s biggest firms on a $500 billion AI-financing plan, pledging to backstop lending to customers that can’t afford its chips otherwise. The chip maker last week also took a stake in Cloverleaf Infrastructure, which arranges power for data centers, and struck a $6 billion deal with startup Poolside aimed at developing a powerful open-weight AI model.

After watching shares in other chip makers and the so-called Magnificent Seven tech companies swing wildly in recent months, Wall Street is hoping Nvidia can beat expectations—again. The countdown is on.

“It’s kind of becoming more and more like the World Cup final than the Super Bowl at this point,” said Brian Mulberry, chief market strategist at Zacks Investment Management. “It’s just gotten to be that big.”

The company has smashed analysts’ earnings estimates for each of the 14 quarters since the AI boom kicked into high gear. Nvidia posted 210% annual growth in net income in its last three-month period, according to FactSet, making Wall Street’s 126% projection look pedestrian.

Expectations for a blowout second quarter have risen rapidly over the course of this year. All Nvidia will have to do to beat this target: outrun 95% annual earnings growth to more than $51.5 billion. Analysts project the chip maker will report record sales of $92 billion for the period, up from a forecast of $78 billion at the start of this year.

In July, big-tech earnings sparked volatility. Concerns about runaway capital spending spread across the sector after Alphabet’s and Tesla’s results, driving a $890 billion wipeout that contributed to the unwind of hedge fund Situational Awareness. Microsoft posted the largest one-day gain in market capitalization by any company, ever, after a quarter proving that it could still show investors the money. SpaceX rocketed higher after a record-breaking initial public offering, only to see $1 trillion in value evaporate.

Surging memory prices and borrowing costs have fueled fears that those and other companies will be unable to keep plowing more money into supplies including Nvidia chips. Shaia Hosseinzadeh, founder of OnyxPoint Global Management, has recently bought dips in AI-infrastructure stocks when Wall Street has strained to absorb massive debt issued by Silicon Valley.

“The macro data is really quite robust,” he said. “Of course, there’s a level at which everything breaks.”

Investors have kept pumping money into the AI trade despite concerns around chip consumers—and to the benefit of chip producers. That is why Nvidia’s outlook for semiconductor demand could send ripples through counterparts such as Micron Technology and Sandisk, developers of the data centers in which their chips reside, and a supply chain of power producers, contractors and other specialists that underpin the globe-spanning AI build-out.

“We joke internally that we’re all Nvidia analysts now,” said David Lefkowitz, head of U.S. equities at UBS Global Wealth Management.

The irony is that investors have tended to sell Nvidia stock immediately after blockbuster earnings, with shares falling each trading session after its four past quarterly reports. Some are betting that will be the case this time around, too.

The options market is pricing in a 5.3% swing, higher or lower, in Nvidia shares during the session following earnings, according to Option Research & Technology Services. That is higher than the 4.8% average move in Nvidia’s stock over the last 12 months after the company reports quarterly results.

In recent days, some of the most actively traded Nvidia options have been put contracts tied to the stock falling from its Friday value of $214.75 to $205 and $210 apiece, according to Cboe Global Markets data. Put options give the right to sell a stock by a set price and typically represent a bearish wager.

Many analysts remain optimistic. Frank Lee, global head of tech hardware and semiconductor research at HSBC Global Investment Research, recently raised his price target for Nvidia shares to $360 from $325, citing, among other things, Nvidia’s strategic partnerships with suppliers and its role as a top contributor to open-source AI.

Hoping for a rate cut before Christmas? Don’t hold your breath

While inflation has hit its lowest point since March 2021, the RBA is likely to exercise caution when it meets next week

Nvidia’s earnings will test Wall Street’s confidence in the AI boom.