It’s a big week.  Nvidia kicked off its annual developers meeting this afternoon.  We have the Bank of Japan tonight.  And the Fed determines policy on Wednesday.

As we discussed last week, there has been a clear effort by the Bank of Japan (BOJ) over the past several months to start setting expectations in markets that they will exit emergency level policies.

Last week, there was talk that they might end negative interest rates tonight.  Today, the Nikkei Asia (a Japanese news source) suggested they will also end yield curve control and ETF purchases.

While they would continue with QE, this would be an aggressive exit from a very long period of ultra easy monetary policy.

Given the fragile nature of global financial markets, and the very deliberate telegraphing of policy moves made by the Fed and other major central banks for much of the past 15 years, this seems like it would be an unnecessarily abrupt move by the Bank of Japan.  It would create risks to global liquidity at worst, and global market stability and confidence at best.

Keep in mind, the major central banks of the world have coordinated policies and worked as partners throughout the crises of the past 15 years (they talk a lot).  With that, we should expect the Bank of Japan to be reluctant to cause any disruption in global markets.

On Nvidia:  As we’ve discussed here in my daily notes, since its May earnings call last year, Nvidia has become the most important company in the world.

When Jensen Huang speaks, founder/CEO of Nvidia, he’s educating the world on the evolution of generative AI, and (as he calls it) the “rebirth of computing.”

Today he did so to an arena full of the world’s leading technologists.  He announced Nvidia’s new chip.  And he says it will be the most successful product launch in the company’s history.  Keep in mind, this is a company that nearly quadrupled in size over the past year, growing quarterly revenue by $16 billion (year-over-year).

As we’ve discussed earlier this month, Huang has said the future of accelerated computing is where “the digital world meets the physical world.”  He talked more about this today.

Nvidia’s Omniverse technology will power it, and it will reshape $100 trillion worth of global industry.

Importantly, the richest and most powerful companies in the world are spending billions of dollars a quarter on Nvidia’s AI chips, and partnering with Nvidia on projects ranging from infrastructure to research, to applications.  They are all-in.  And so is (virtually) everyone else.  These are companies collaborating with Nvidia …

It’s a new industrial revolution.  And it’s still very early. 

We had the February inflation data this morning.

It looks like this …

As you can see, the headline Consumer Price Index (CPI) has stalled around the 3% mark.  And it happens to have leveled off from where the Fed made its last rate hike.

The speculation has been that the move from 3% to 2% will be longer and more difficult than the move from 9% to 3%.

But the Fed’s favored inflation gauge, the Personal Consumption Expenditures Price Index (PCE), has had a much cleaner path.  At the current 2.4% level, it’s not far from the Fed’s target.

What’s the story?  As we’ve discussed over the past few months, the insurance component of CPI has been a significant drag.  Jerome Powell said the same recently.

Take a look at the direction of household insurance …

And the direction of auto insurance …

As we’ve discussed here in my daily notes, the massive monetary and fiscal response to the pandemic (plus the subsequent agenda spending binge) ramped the money supply by 40% in just two years.  That was almost a decade’s worth of money supply growth (on an absolute basis), dumped onto the economy in a span of two years.

That inflated asset prices.  And the insurance industry spent the past two years raising the price to insure those higher priced underlying assets.  But as we’ve also discussed this is a lagging feature (likely a late stage feature) of a hot inflationary period.

If we just pull out shelter from the consumer price index (which is influenced by changes in insurance premiums), CPI drops below 2%.

After hearing testimony from Jerome Powell the past two days on Capitol Hill, and after hearing from a slew of Fed speakers over the past week, the takeaway is that the Fed is comfortable not messing with an economy that seems to be doing well (for the moment) with a Fed Funds rate above 5%.

Still, despite highly restrictive monetary policy, we head into the February jobs report tomorrow morning with stocks on record highs.

On jobs, as we discussed yesterday it was a hot January jobs report and a big upward revision of the December payroll number that sent yields screaming higher in early February (to the tune of almost 50 basis points).  That said, the 10-year yield is down almost 25 basis points in just the past nine days.  Perhaps in anticipation of some downward revisions to come (in the jobs data)?

If we’re looking for a trigger in the economic data, at this point, that might disrupt the current drum-beat narrative of the Fed, it would be a softer employment situation (i.e. a threat to the “maximum employment” component of the Fed’s mandate).

Let’s take a look at gold …

Gold is making new record highs by the day.  Today was the sixth consecutive higher high, and higher closing price.  That has coincided with five consecutive lower daily closes on the dollar index.

If we look back at the events that aligned with the prior highs in the chart above, we have 1) the oil price shock and broad inflation shock of early 1980… 2) the collapse of Bear Stearns … 3) thirty-one years later gold finally surpassed the 1980 highs, and the catalyst was rising global sovereign debt risks, in the aftermath of the global credit bubble burst (gold spiked on the downgrade of U.S. debt and a European sovereign debt crisis)… 4) global war risk on Russia’s invasion of Ukraine … 5) 2023 bank runs and risk of contagion … 6) an 18% two month rise to a new record level originating from the October Hamas attack (global war risk) … and 7) currently gold is, unusually, sustaining these record high levels.

Notably, with the explosion in the money supply, the new record high prices in gold are clustering — which is bullish. 

With that, we’ve often looked at this longer term chart of gold over the years.

This is a classic C-wave (from Elliott Wave theory). This technical pattern projects a move up to $2,700ish.  The price of gold has continued to make progress along that path.  

How do you play it? 

Get leveraged exposure to gold through gold miners, or track the price of gold through an ETF, like GLD. 

Full disclosure, we are long gold miners, including Barrick Gold in our Billionaire’s Portfolio.  

We heard from Jerome Powell today, at his semiannual Congressional testimony.  His prepared statement, which he’ll repeat in a visit with the Senate tomorrow, was short and uneventful.  

So was the Q&A.  For those looking for clues on some sort of incremental change, there were no clues.  In the prepared remarks, he said “our restrictive stance of monetary policy is putting downward pressure on economic activity.”  But he repeated the recent mantra of needing “more confidence” to make a move on rates (i.e. more data to assure the low level and falling inflation trajectory is sustained).

He did acknowledge increases in insurance prices as “adding meaningfully to inflation.”  And as we’ve discussed in my daily notes, the good news is, this (rising insurance premiums) is a lagging feature (likely a late stage feature) of a hot inflationary period.

Now, we talked yesterday about the recent Fed commentary on risks to employment, if the Fed were to stay too restrictive, for too long.  

On that note, we get the February jobs report on Friday.

This will be a big one.  It was the January jobs report (which came in on February 2nd) that reset the market outlook on interest rates. 

As you can see in the chart of the 10-year yield, a hotter jobs number sent the 10-year yield from 3.87% to as high as 4.35% by the end of last month. 

And the interest rate market swung from fully pricing in 50 basis points of rate cuts by June, to now pricing in a bit better than a coin flips chance for just a 25 basis point cut by June.

So, what was that hot payroll number?  It was 353,000 new jobs added.  Expectations were for 185k.  Moreover (maybe more importantly), there was a big upward revision to the December jobs number.  It was revised up from 216k to 333k. 

Now, this is especially interesting, as we head into Friday’s numbers, because the Bureau of Labor Statistics has a history of making large revisions in the jobs data, under the current administration.  

Remember, we talked about this back in January (here).  As you can see in the table below, the BLS revised UP eleven of the twelve months of nonpayroll numbers in 2021.  And it was significant.  For the full year, the initial monthly reports UNDER reported job creation by 1.9 million jobs. 

So, the job market was much stronger than was initially reported in 2021.  And the view of a relatively modest job market recovery was used to justify the Fed’s claim that inflation was “transitory.”  And the Fed’s claim that inflation was “transitory” was used to rationalize Congress’s pursuit of even more fiscal stimulus (which was more fuel on the inflation fire). 

You could argue the opposite has happened in 2023 …

With a December revision remaining, the BLS has OVER reported job creation by over 300k jobs.  They’ve revised DOWN ten of the twelve months.   

So, 2023 looks like the opposite of 2021.  And the Fed has the opposite policy stance of 2021 — now highly restrictive, with job growth that is weaker than was initially reported.

With the above in mind, we may see some meaningful revisions to the December and January data, within Friday’s job report.