Warsh still uncomfortable with inflation rate, as Meta surges

The first major event risk of the week is now out of the way. Kevin Warsh spoke at the ECB’s central banker conference in Portugal today, along with Christine Lagarde and Andrew Bailey. He did not reveal much of anything, he is not a fan of forward guidance, and he spent most of his time dodging tricky questions from the moderator.

Warsh might dodge certain questions, but his comments on the panel were still market-moving. The dollar pulled back when he said that price risks have come down in recent weeks, however, we do not think that this will be enough to lead to a longer-term decline in the buck. Warsh was clear that he is not comfortable with the inflation rate above the 2% target rate, currently inflation is at 4.2% in the US.

AI a risk for inflation, according to Warsh

Warsh’s comments on AI were fascinating. Although he sees AI as boosting productivity and acting as a disinflationary force in the future, for now it is inflationary, as the build out continues at pace. Warsh said that AI has sparked demand inflation, and he is watching out for supply inflation. Apple’s announcement that it was raising prices for its products due to surging memory chip costs could feed into the Fed’s inflation fears in the months ahead. Any other signs that AI giants are passing on chip and other related costs to consumers could be a cause of concern for the Fed under Kevin Warsh.

The markets were bracing for a hawkish speech, in the aftermath there has been some ‘buy the rumour, sell the fact’, but overall, I do not see Warsh’s comments as shifting the dial for the US interest rate outlook. There is still a good chance of one hike at some point this year.

Fed data overhaul confuses the picture even more

Overall, the data will determine what the Fed does next. However, the new Fed chair did not seem convinced with some of the current economic indicators that the Fed uses. His new task force squad will be looking at shaking up the economic data that is collected by the Fed to reflect changes made by companies. Thus, until we see the outcome of these task forces even economic data reports will be difficult to use to gauge the direction of Fed thinking.

EUR sinks on Lagarde’s inflation comments

As we move through the afternoon, the dollar is picking up from its earlier lows, and the euro is sinking. EUR/GBP fell to a one year low, and although USD/JPY is lower on the day, it remains above 162.00. The pound is also clawing back losses. GBP/USD is back above $1.3250, even though UK Gilt yields are lower on the day. There are many factors impacting Gilt yields right now, not least Andy Burnham’s latest economic policy plans, so comments from Bailey today may not have a long-term impact on the pound.  

So far, most of the reaction to the central bankers’ panel has been in the FX market, and  bond yields are mildly lower in the UK and the US, however, yield curves are steepening in Europe as the market prices out the chance of a near term rate hike from the ECB.

Meta surges, but has it reached peak AI spend?

Elsewhere, US tech stocks are starting Q3 on a low note. The Nasdaq is currently lower by more than 1%, and volatility is picking up, as some AI names like Coreweave, Micron and Arm Holdings pullback. In contrast, Meta is higher by more than 10% today, and is clawing back losses, after it announced that it was developing plans for a cloud infrastructure business, that will sell access to AI computing power and models. This will help make Meta a full-stack AI company, with the ability to sell AI compute to the general market.

However, this is more interesting than it looks on paper. If Meta is willing to sell AI compute, does this mean that it has reached peak AI capex? Could its AI investment plans fall from here? It suggests that it has excess AI compute, so it may not be extending its AI offering by as much as some anticipated. If Meta is one of the first hyperscalers to reduce capex spending this could cause shock waves in the AI trade over the coming months, with chip stocks coming under pressure, while Magnificent 7 hyperscalers could make a comeback after a shocking performance in Q2.

In contrast, the Dow Jones hit another record, as the oil price fell further, with Brent crude down 2% and it is currently trading below $72.00 per barrel.