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Macro week with CPI report, rate expectation changes (0:20) Headline AI layoffs (6:30) Trump and co's trip to China (8:00) Ford's interesting energy story (8:50) Nvidia the next big headline report (11:20)

Transcript

Rena Sherbill: Welcome back to Wall Street Roundup. Welcome back to you, Brian Stewart, our Director of News at Seeking Alpha.

Brian Stewart: Great to be here.

Rena Sherbill: Great to have you. Walk us through this week.

Brian Stewart: This week was much more of a macro week than last week. Last week there was a lot of earnings coming out this week.

The pace of earnings slowed down. We're kind of in wait and see mode on that front for Nvidia (NVDA) next week and a bunch of retailers are coming out.

We saw the market basically drift higher. It set new highs again. It's down a little today. This is despite some concerning news on the economic front, specifically from the inflation part of it.

CPI for April came out, headline number up 3.8 % compared to last year was 3.3 % in March. A lot of that was in energy, gasoline, oil, everything that you would guess with Strait of Hormuz being closed. However, the markets are seeing this as not just a kind of one-off volatile situation.

There's concern that even as the higher oil prices work their way through the markets, work their way through the other parts of the economy, it's going to lead to inflation down the line.

So basically you're seeing things kind of work their way downstream. The longer this goes on, the more likely that becomes. It's being borne out in the Fed odds. The Federal Reserve, which is going to get its Kevin Warsh coming in for the next meeting.

Besides that new blood coming in, we don't see much on the horizon in terms of movement. The market widely, upper 90%, thinks that there's going to be no change in June.

But if you look ahead to the end of the year of the December meeting, there's now basically a 50/50 chance that we're going to have higher rates by the end of the year. That chance was essentially zero a month ago and was only about 15% a week ago.

So you're seeing this CPI report really having an effect on the expectations for interest rates.

Rena Sherbill: Is that correlation something that you were expecting once you saw that report come out? Were you expecting the expectation change?

Brian Stewart: It was pretty high. It you can never really tell, especially with the headline number and oil being the underlying kind of inflation driver of the moment, how the market is going to to take that.

There's a reason why there's a headline number and a core number. And usually you look at the core number because it strips out food and energy. People complain food and energy is basically anything anyone buys. It's shelter food and energy, and that's 90 percent of anybody's paycheck.

But the reason they strip that out is because those can be really volatile. So you can have oil up one month and then down another month. But when you're in a situation that we're in now where oil is up, it has been up for a period of weeks and going on months. It starts and no end in sight, right?Negotiations continue. There's kind of tit for tat back and forth. A lot of posturing, a lot of kind of positioning for leverage, that kind of thing. But no real signs of a breakthrough.

And eventually, like I said, that stuff works its way through the rest of the economy and becomes not just about how much you're paying at the pump, but how much food costs, how much every other item that you're going to buy costs.

And so when you see a number like 3.8%, remember the Fed's target is 2%. So we're close to double its target at that point.

I wouldn't say I would have predicted it going into the CPI report, but it's certainly not surprising that the expectations for the Fed.

I have to admit, honestly, I was surprised it took this long for the market to start pricing in rate hikes. I thought at least a couple of weeks ago, there should have been some movement in that direction.

So I do think that you have a market that wants to be optimistic. You see it drifting higher this week, largely led by technology and sort of the AI trade saw more of kind of a risk on movement and you see that happening in the face of concerns about Iran, you see it in the face of concerns about inflation.

And so I just think that there's sort of a knee jerk, this will work itself out kind of opinion among investors and traders. And I think it's taking a while to wrestle with the consequences of what's coming.

Rena Sherbill: Noteworthy, consumer stocks that you mentioned, something that George Noble talks about. I interviewed him. He's doing this conference next week with Seeking Alpha. It's next Wednesday, May 20th. The Best Income Ideas Online Summit, with our very own Steve Cress, Luke Groman, Michael Howell, our very own J Mintzmyer, and many others.

We were talking on Investing Experts ahead of that conference. And I'm also going to do a special Saturday Wall Street Breakfast podcast about consumer stocks and how affected they are by this whole narrative.

Any other notes to add about Kevin Warsh being confirmed?

Brian Stewart: I think it's an interesting kind of a psycho political situation. Obviously there was a lot of pressure that President Trump put on outgoing Fed Chair Powell to lower interest rates, coming out in public, demanding lower rates to the effect that investigations being done to kind of put pressure on him, allegedly, suppose.

And so presumably, Warsh is coming in with a mandate to lower rates. He's Trump's pick. And there was a lot of worry about the independence of the Fed. But the impression I get, and the time will tell, Warsh doesn't seem like a toady. I mean, he seems like a serious central banker. He was on the Fed previously. He has a long career on Wall Street.

So I don't foresee him being, I don't want to name names of other people in the administration, but you can think of people who might be more just sort of sucking up to Trump and doing what he wants and things like that. But I don't foresee that for Warsh.

And he's coming in at a time when, as I said, all signs are pointing that higher rates are becoming more and more necessary to keep a cap on inflation. At a time when people are worried about the job market, like so far so good on the job market, so it's been not much hiring, but not much firing, but we're still seeing those headline AI layoffs coming out this week.

Cisco (CSCO) was the latest one. Cisco is up 13 % after its earnings had strong results, strong guidance.

But one of the bullet points in there is that it laid off a few thousand workers specifically saying it was because it was going to focus more on AI and that follows up on, you know, the same kind of thing that happened at Amazon (AMZN), the same kind of thing that happened in Meta (META).

So you're seeing more and more of these AI related layoffs at these big tech companies now that hasn't been enough to really move the needle in terms of the unemployment rate.

But you have high inflation, you have a situation where there's signs that the labor market might have some pressure on it in the near term. And you have a new Fed chair coming in who's going to have to look at the landscape. I think, you from a market's perspective, know, new is always a little scary, you have to kind of figure out where we're at.

So as much criticism as people might have about Jerome Powell and how he handled inflation, especially after the pandemic, at least he's a known quantity. So I do think that it'll be interesting, especially during the press conference that follows the June Fed meeting. It'll be interesting to see how he handles things, what his communication strategy is, those kind of things.

Rena Sherbill: Anything to note about Trump's trip to China? Trump and co.

Brian Stewart: I didn't really see any market moving kind of headlines. It seemed very, amicable, it seems not like a situation which we've seen in other circumstances, Venezuela, Iran, where there's a belligerent tone, even things like Greenland and Canada and things like that. That isn't the tone that I perceived going to this meeting.

So I think it's much more a meeting of superpowers. I think there's sort of a recognition that China is the main competitor for the US in terms of global hegemony. And so I think there's a real effort to keep that relationship civil.

Rena Sherbill: What else would you say? What else is on the horizon or has been on your horizon stock wise this week?

Brian Stewart: The other ones that I wanted to mention, so Ford (F), I thought was an interesting story this week. It jumped 13% on a Morgan Stanley note earlier this week and then rose another 6% the day after that. So you see a very sharp increase.

Morgan Stanley said that the company could benefit from its energy storage business and with the AI data center build out, it sees deals with hyperscalers coming for Ford.

This reminded me of Caterpillar (CAT), which we talked about a while back. Caterpillar is up 54 % year to date. It's up 150 % over the past year. And a lot of this is sort of second order AI enthusiasm.

The idea that Caterpillar is going to benefit from the build out of the AI data centers. And so you now have another online company that isn't particularly AI-ish on the surface, but could see some upside from the AI build out.

So I think you're seeing kind of a category build here of these older companies, more seen as old school, cyclical manufacturing companies that might be able to position themselves in the new AI world.

And then I think you're also going to see other companies try and position themselves that way, because you see a stock that can pop 13 % on just sort of the realization that they have an energy business. There wasn't any really news pursuant to that.

The downside of that is I think there's a kind of a whiff of dot com-ness about it. The old days in the early 2000s or late 90s when a company would just change its name to whatever dot com just to get the boost in stock price. you have companies just sort of in their communication, just sort of mentioning AI. It's like, yeah, we've got this AI project or this product would be good for AI, that kind of thing.

Was it Allbirds, the shoe company recently that that pivoted to AI? They basically took the $50 million they'd earned as a shoe company and they were just going to buy data center, just buy chips with it. I think as for the market as a whole, things like that are very bubbly seeming.

So I think you can kind of see it both ways, if you're a bull, you're like, look, this is AI making its way through the market. You see companies adjusting, you see companies changing the business plans and you see sort of a new economy evolving around AI.

And then if you're a bear, you're saying this is just companies are doing PR to try and get a stock pop, which are bubble signs.

Rena Sherbill: For sure, frothy, frothiness afoot. Next week?

Brian Stewart: Next week, Nvidia (NVDA) is the big headline. You also have a lot of retailers coming out. We have Walmart (WMT), you have Home Depot (HD), Lowe's (LOW).

So we're going to get a pretty good read on the consumer. It's a really light week in terms of economic news. So as a proxy for economic news, think those retailer earnings will be interesting, especially the commentary surrounding them.

Walmart obviously has its fingers extending all throughout the country so I think you're going to get a feel for how the consumer is doing.

In terms of Nvidia. It was up about 5% so far this week. It was down a little today as we started recording. It's up 39% since March 30th, which is a huge move for a company that's already trillions of dollars in market value and has already climbed so much in the past several years, so you see a fair bit of excitement going into the earnings report.

And I think with Nvidia, it's really a valuation discussion. I don't think anyone is expecting bad or disappointing results from Nvidia. People are buying chips hand over fist. The demand couldn't be higher for their products.

But the question is, can they provide growth rates commensurate with the upside that the stock has already had? So I think that'll be the debate coming out of earnings.

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