Doves Vs. Hawks

Just because the Federal Open Market Committee finally got the ball rolling on reducing short-term interest rates last week does not mean that our central bankers will move to the sidelines for a little while. As a matter of fact, Fed officials are out in force this week, as if they either as a group or as individuals, have something to say. There are still three weeks left of this barren space that we have in between earnings seasons. Then we get to find out just how extreme (or not) valuations have become.

This is also a rather thin week as far as the macro is concerned, at least until Thursday. Then we'll see some numbers. For now, though, the dog and pony show that the Federal Reserve Bank is what we have to look at and listen to. On Monday, though there were quite a few Fed speakers on the docket, the Fed's most dovish speaker and most hawkish speaker were actually speaking publicly simultaneously.

Brand new Fed Gov. Stephen Miran spoke from New York. Miran explained why he dissented from last week's quarter-percentage point rate cut in favor of a half-point cut. He demonstrated his opinion that the appropriate target for the Fed Funds rate would be in the low to mid 2% range, which is about two percentage points below where it currently is. He warned that what he referred to as "very restrictive" monetary policy would risk "unnecessary layoffs and higher unemployment."

Miran went on to explain how changes in immigration, tax law, increased tariffs and reduced regulation had pushed the U.S. economy's neutral interest rate lower, saying that as a member of the Board of Governors, he would "lay out my economic arguments as clearly and transparently as I can, and hope to persuade some people by the force of the economics." 

Miran added, "If that means continuing to dissent... then that's the way it's going to be."

Hawkish Screech

As had been her predecessor as president at the Cleveland Fed, Beth Hammack has become the thought leader of the hawkish camp at the central bank. Cleveland does not have voting rights this year but will in 2026. Hammack spoke from Cleveland on Monday. She acknowledged the split in economic performance across different groups that she is seeing in her district. She acknowledged that if not the country, then at least the Cleveland district, is mired in a low-hiring environment.

Hammack is far more concerned, however, about consumer-level inflation at present than is Stephen Miran. Hammack made her point: "I think that we should be very cautious in removing monetary policy restriction, because I think it's important that we stay restrictive to bring inflation back down to target." 

Hammack explained, "I do expect that early next year, we'll start to see another wave of pricing pressures. There are a lot of contracts that get negotiated at the beginning of the year, and so we could see another wave of price increases that are happening in the first and second quarters of next year. So that's something we need to continue to watch."

Tie Breaker?

Fed Chair Jerome Powell is set to speak this afternoon at 12:35 p.m. ET from Warwick, Rhode Island. Traders, investors and the business community at large will be listening for any clues on how the central bank will proceed, or at least how Powell is thinking less than a week after his press conference last Wednesday.

The target range for the Fed Funds rate currently stands at 4% to 4.25% after last week's cut. The both all-important and completely ridiculous "dot plot" showed a median expectation for an additional half-point worth of rate cuts this calendar year. That median was not truly representative of any consensus opinion, as there is an obvious divide at the FOMC.

Within that dot plot, you had Stephen Miran way more dovish than the rest of the committee, targeting a Fed Funds rate below 3% by year's end and you had Beth Hammack who actually advocated for higher, not lower, interest rates by year's end. In between the two extremes, nine dots (FOMC members) saw a half-point worth of additional rate cuts over the final two policy meetings of 2025, but six dots expressed the view that last week's cut was a one-and-done situation, meaning no more rate cuts this year.

What that means is that the median expectation is far less meaningful than it usually would be. The real argument is between the camp that wants to take interest rates down by another half-percentage point and those that do not want to cut rates again this year. One has to think that both Hammack and Miran placed their dots so far outside of what could be considered realistic or even reasonable was simply an attempt to impact that median. Ahh, the games people play.

The Brains of Tomorrow

On Monday, Nvidia- NVDA and Microsoft- MSFT backed OpenAI outlined a partnership that included plans for a massive data center build-out project and a $100 billion investment by the high-end chip designer in the AI start-up. This deal will allow OpenAI to build and deploy 10 gigawatts of AI data centers to train that firm's future generations of large language models. The first phase of this build-out is expected to come online at some point during the second half of 2026 using Nvidia's Vera Rubin platform architecture.

For comparison's sake, according to the Wall Street Journal, the electric power required for this project would initially equal that equivalent of what can be provided by more than four Hoover Dams or the equivalent consumption of roughly 8 million single family homes. Nvidia CEO Jensen Huang said on CNBC, "This is a giant project," and referred to OpenAI as the "fastest growing software company in history."

Readers may recall that earlier this month, a plan was announced where Oracle ORCL would provide OpenAI with up to 4.5 gigawatts of capacity over the next five years for up to $300 billion. Oracle was up 6% on Monday on news that CEO Safra Catz was being kicked upstairs to become Executive Vice Chair (told you that balance sheet was an eyesore) and would be replaced by new co-CEOs Clay Magouyrk and Mike Scilia.

Very interestingly, analysts at Bank of America pointed out that Nvidia's investment in OpenAI could grow to as much as $500 billion over time. As part of the deal OpenAI will work with Nvidia as a preferred strategic partner, thus putting competitors such as Advanced Micro Devices AMD and Broadcom AVGO behind the eight ball. So, can one lock up a huge customer through making huge investments in that customer? I guess we'll find out how profitable such a strategy really is. The real winner here could actually be a company like Micron MU, as the growing demand for expanded memory seems to know no limit. Micron reports tonight. 

Mixed Markets

Yes, I know. New record highs for the major indexes on Monday. That was largely the result of a broad pop in share prices across the tech space in response to the above news. The rally was not really as broad as one might have thought, though the profit-loss ratio certainly didn't mind.

The S&P 500 gained 0.44% on Monday as the Nasdaq Composite gained 0.7%. Huzzah! The Philadelphia Semiconductors roared ahead by 1.57% led by Applied Materials AMAT and Lam Research LRCX. Readers may recall that last week in this column, we mentioned the possibility after Nvidia's investment in Intel INTC that conditions were rapidly moving in the right direction for the semiconductor equipment companies.

However, the Dow Transports closed essentially flat on the day, while the small- to mid-cap indexes ran from -0.1% to +0.59%. The banks sold off as well. Just four of the 11 S&P sector SPDR ETFs closed in the green on Monday. Obviously, Tech XLK was your leader, but followed by the Utilities XLU, which is an odd pairing in a day that yields really did not move much. The Staples XLP easily led the losers on Monday as Kenvue KVUE was pummeled for obvious reasons.

Breadth was positive, though. Winners beat losers by a 4-to-3 margin at the Nasdaq, and by just a smidgen at the NYSE. Advancing volume took a 63.7% share of composite Nasdaq-listed trade and a 54% share of composite NYSE-listed activity. All that said, aggregate trading volume was sharply lower across the board coming off of Friday's "triple witching" expiration event. Bottom line? The reduced trading volume does make price discovery on Monday less meaningful. The fact that today is a Jewish holiday could further suppress trading volume. Carry on, gang.

Economics 

(All Times Eastern)



08:55 - Redbook (Weekly): Last 6.3% y/y.

09:45 - S&P Global Manufacturing PMI (Dec-Flash): Expecting 51.7, Last 53.0.

09:45 - S&P Global Services PMI (Dec-Flash): Expecting 53.4, Last 54.5

10:00 - Richmond Fed Manufacturing Index (Sep): Expecting -8, Last -7.

4:30 p.m. - API Oil Inventories (Weekly): Last -3.42M.

The Fed

(All Times Eastern)

09:00 - Speaker: Reserve Board Gov. Michelle Bowman.

10:00 - Speaker: Atlanta Fed Pres. Raphael Bostic.

12:35 p.m. - Speaker: Federal Reserve Chair Jerome Powell.

Today's Earnings Highlights

(Consensus EPS Expectations)

Before the Open: AZO (50.78)

After the Close: MU (2.86)

At the time of publication, Guilfoyle was long NVDA, MSFT, AMD, MU, LRCX equity.