Fed’s Beige Book Points to Modest Growth in US Economy, Prices Business contacts say consumers pushing back on higher prices
The US economy expanded at a “slight or modest” pace across most regions since early April and consumers pushed back against higher prices, the Federal Reserve said in its Beige Book survey of regional business contacts.
“Retail spending was flat to up slightly, reflecting lower discretionary spending and heightened price sensitivity among consumers,” according to the report released Wednesday. “Overall outlooks grew somewhat more pessimistic amid reports of rising uncertainty and greater downside risks.”
Employment rose at a slight pace with eight of twelve districts reporting “negligible to modest job gains.” Several districts reported wage growth at, or moving toward, pre-pandemic levels.
Prices increased at a “modest pace” over the period with business contacts noting consumers pushed back against additional price increases.
June BoC Preview: A Clear Case for a First Cut
From Goldman Sachs:
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The April CPI report was soft for the fourth straight month, thereby confirming that disinflation is well underway in Canada. A wide range of underlying inflation measures have fallen below the BoC’s 2% target on a three-month annualized basis (and stand only slightly above 2% on a six-month annualized basis), and inflation progress in Canada is well advanced relative to its DM peers. We therefore expect that the BoC will determine that downward inflation momentum has been sustained and cut its policy rate by 25bp to 4.75% at next week’s June meeting.
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The main arguments against cutting next week are that 1) improving activity data might lower the urgency to ease and 2) the BoC might prefer to cut for the first time when they update their forecasts at July’s Monetary Policy Report (MPR) meeting. While these factors raise some risk that the BoC could delay cutting, activity levels remain subdued and the BoC has been willing to pivot policy at non-MPR meetings in the past, so we see only modest risks of a delay.
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Looking ahead, we expect that the BoC will provide only weak guidance on future cuts, perhaps noting that they are conditioned on further evidence that downward inflation momentum is sustained. Given our expectation that inflation progress will continue and that growth should recover to near-trend pace in 2024H2, we forecast that future cuts will proceed at a quarterly pace (with 75bp of cumulative easing by end-2024) until reaching a terminal rate of 3.25%. Our baseline forecast is dovish relative to market pricing, as is our risk-adjusted forecast that accounts for different policy scenarios.
This Record Stock Market Is Riding on Questionable AI Assumptions Just four giant technology stocks added more market value than the rest of the S&P 500 put together this month. More than half of the gain came from Nvidia.
Nvidia, Microsoft, Apple and Alphabet between them have added over $1.4 trillion this month, more than the other 296 stocks that rose put together. Half of the gain was just one company, chip maker Nvidia.
Behind the rises in the biggest stocks this month and this year are two trends, which have already run a long way: Artificial intelligence and higher-for-longer interest rates. Any trend can always go further, but there are challenges to both.
To see what could go wrong, note that this isn’t the usual speculative mania (though there was a mini-AI bubble last year). Nvidia’s profits are rising about as fast as its share price, so if there is a bubble, it’s a bubble in demand for chips, not a pure stock bubble. To the extent there is a mispricing, it’s more like the banks in 2007—when profits were unsustainably high—than it is to the profitless dot-coms of the 2000 bubble.
The threat to Nvidia’s share price is therefore about threats to its earnings. There are four risks:
1) Demand falls because AI is overhyped. The International Monetary Fund says AI will “transform the economy.”President Biden says AI is “the most consequential technology of our time.” And leading suppliers of AI—including the chief executive of OpenAI—said in a joint letter that “Mitigating the risk of extinction from AI should be a global priority.”
Yet, large language models remain limited. I’ve yet to meet someone who is pleased to be faced with a customer-service chatbot—the main use case of which seems to be to try to figure out how to get past it to speak to an actual human.
It helps programmers, but few outside the coding community got excited when, for example, GitHub transformed software development, long before ChatGPT came along. Microsoft’s Copilot can help beginners improve PowerPoint presentations, which might make office life a little less dull. And helping users with Excel is important. But again, a better “Help” function wouldn’t normally get investors’ pulses racing.
Don’t get me wrong. I’m deeply impressed by the progress of large language models, the technology behind ChatGPT. But all of my attempts to use it for work came with errors that took more time to fix than if I had just done it myself. It’s like having a 12-year-old help out.
Many LLMs fail basic tests, often in amusing ways—Google advises adding glue to pizza, for example. Copilot highlights the risk of being eaten by a cabbage when asked how to cross a river with a goat. Are they really ready for prime time? Perplexity is a great AI-assisted search engine, but the promise of AI goes a lot further than a better Google. The technology has yet to live up to the hype, and the risk is it takes much longer than buyers of Nvidia chips believe.
2) Competition reduces prices. Nvidia rules supreme in the high-end graphics processing units used for AI. But it faces competition from well-funded customers such as Alphabet and Meta Platforms, a slew of startups, and traditional rivals such as Intel trying to catch up. Even if they aren’t as good, they should limit Nvidia’s ability to charge pretty much what it likes.
3) Nvidia’s biggest supplier, Taiwan Semiconductor Manufacturing, might want a bigger slice. TSMC actually makes the chips. If it jacked up the price it charges Nvidia, no one else could step in to replace it in any reasonable time period. It might not want to risk its long-term relationship. On the other hand, it might want some of the cash pouring into Nvidia.
4) What if scale doesn’t matter? The designers of AI models think there is an advantage to getting big quickly. More use gathers more data, which makes the models better, which attracts more users, in a virtuous circle. The big should get bigger. Such a frenzy fuels the demand for AI chips.
If the argument is right, a lot of people who invested in the models that prove to be the losers will have wasted their money. The current boom in demand for chips should also die down once the also-rans give up. That is a way off but is a threat to future Nvidia sales.
If the scale-matters argument is wrong, and what businesses actually want are smaller, dedicated AI models trained in large part on their own data, or that startups can do AI just as well as the giants, a lot of money will have been wasted.
Investors assume continued rapid growth from Nvidia, with the stock on a multiple of 38 times forward earnings. Superfast commercialization of LLMs has become the baseline for investors who have pushed up other stocks that should benefit, such as suppliers of electricity, cables and data centers. It is another sign of just how much investors have swallowed the hype that they are willing to bet on such distant potential beneficiaries of the AI boom.
I fear the market is paying too little heed to the risks. AI may be a big deal, but it’s unlikely to pan out the way people seem to think.
Today only:
- Klarna Marketing Chief Says AI Is Helping It Become ‘Brutally Efficient’
- PwC Set to Become OpenAI’s Largest ChatGPT Enterprise Customer
- Palantir Wins $480 Million AI Computer Vision Deal With US Army
- OpenAI Strikes Licensing Deals With The Atlantic and Vox Media
- OpenAI CTO Says Generative AI’s Economic Impact Only Starting
OpenAI’s latest GPT-4o model, which helps users generate content such as text, presentations and videos, is becoming more intuitive to use and that’s spurring its adoption, Murati told Singapore’s Asia Tech X conference via video on Thursday. People are increasingly using AI tools for tasks such as coding, writing and administrative work, she said.
“We don’t quite realize the impact that this is going to have in businesses and at work because it is just starting,” she said. “But what we’ve seen so far is that over a very short amount of time, these AI systems have entered the workforce as collaborators.” (…)
Gleaned in 10 minutes:
- 10 startups harnessing the power of AI The 2023 MIT Digital Technology and Strategy Conference featured startups that help companies anticipate disruptive technologies, boost customer service metrics, and improve last-mile deliveries.
- New work from MIT Sloan researchers shows how generative AI can be deployed in the enterprise today.
- Workers with less experience gain the most from generative AI
- How generative AI can boost highly skilled workers’ productivity
- 15 Unexpected Ways AI Technology is Being Used Today
I spent 3.5 weeks in Singapore watching my son and some of his associates use AI helping various clients in industries such as energy, mining, retailing, coding, finance, etc. and it was amazing how efficient they were, yet only beginning to fully use rapidly evolving AI tools.
BTW, here’s one way Bloomberg uses LLMs in finance, courtesy of Apollo’s Torsten Slok::
Quantifying Fed Sentiment
The Bloomberg natural language processing model analyzes Fed speeches and currently shows FOMC members moving toward a tightening bias. Note how the model never predicted rate cuts in 2024. Instead, Fed sentiment has simply been less hawkish in 2024 than in 2022 and 2023.
The bottom line is that this Fed sentiment model using data back to 2009 shows that Fed communication continues to favor Fed hikes rather than Fed cuts.
Xi Lays Out Vision for Greater Cooperation With Arab States
Chinese leader Xi Jinping outlined a range of areas including finance and technology in which his nation can enhance cooperation with Arab nations, underscoring Beijing’s push for greater influence in Middle East.
“China will work with the Arab side as good partners to make our relations a model for maintaining world peace and stability,” Xi said Thursday in a speech to the China-Arab States Cooperation Forum in Beijing. He listed artificial intelligence, green tech and finance as sectors open for greater collaboration. (…)
Beijing-based Lenovo Group Ltd. has announced a deal to sell $2 billion of convertible bonds to Saudi Arabia’s sovereign wealth fund, and build research and production facilities in the kingdom. State oil firm Saudi Aramco is in talks to buy a $1.5 billion stake worth in a Chinese petrochemical firm, while carmaker China FAW Group is part of a push to make electric vehicles in Egypt. (…)
As the Biden administration backs Israel in the conflict, China supports an immediate cease-fire and recognition of a Palestinian state. That alignment with Arab states is helping Beijing to extend its political sway in countries that until recently saw China chiefly as an economic partner — and win new allies in its global contest for influence with the US.
Under Xi, China has pushed to build an alternative world order to challenge the US, embracing Russia and emerging economies in the so-called Global South. Beijing has cast itself as the leader of the BRICS bloc, which it has worked to expand. Iran, the UAE, Ethiopia and Egypt all accepted invitations to join this year. (…)
China also said it would expand industrial investment in Egypt in areas including electric vehicle and solar panel manufacturing.
Speaking on the sidelines of the forum, the Palestinian envoy to China, Fariz Mehdawi, described Beijing as friendly with nearly every nation in the region.
It “has no problem with anybody, not like our American friends, unfortunately, I’m sorry to say that,” he said. “But this is what makes China more eligible to play a constructive, positive and not controversial role.” (…)
China gets more than one-third of its crude from members of the six-nation Gulf Cooperation Council, with the lion’s share coming from Saudi Arabia. (…)