The Fed Gets Frank

Fed Chair Jerome Powell spoke at length from Philadelphia on Tuesday. Sometimes, Fed speakers, even Fed chairs, can be vague when speaking, especially heading into a policy decision. Upon this occasion, Powell was quite open in his opinions. While we do not always agree on policy direction or timing, as traders and investors, we always appreciate when decision makers are publicly candid. The Federal Open Market Committee will release its next policy statement on Oct. 29. The pre-meeting media blackout period starts this Saturday.

On Tuesday, Fed Chair Jerome Powell discussed the possibility that the U.S. central bank could be nearing the end of its "quantitative tightening" program. Since mid-2022, the Fed has been steadily reducing the size of its debt security holdings by allowing maturing proceeds of its U.S. Treasury and mortgage-backed securities to roll off of the balance sheet.

While Powell did not exactly offer up a date for this program to end, he did say, "Our long-stated plan is to stop balance sheet runoff when reserves are somewhat above the level, we judge consistent with ample reserve conditions. We may approach that point in coming months, and we are closely monitoring a wide range of indicators to inform that decision." Powell added that "Some signs have begun to emerge that liquidity conditions have gradually tightened."

The Fed still has almost $6.6 trillion in holdings on its balance sheet, down from nearly $9 trillion in April of 2022. Ahead of blowing up the money supply and monetary base during the pandemic, the Fed had balance sheet holdings of less than $3.8 trillion in late 2019. Ahead of the "Great Financial Crisis" until late 2008, the Fed's balance sheet had never held as much as $1 trillion worth of assets.

For, Powell, There's a But ...

But Powell does see the central bank continuing to pay interest on bank reserves, despite suffering operating losses for several years now. On this topic, Powell commented, "While our net interest income has temporarily been negative due to the rapid rise in policy rates to control inflation, this is unusual. Our net income will soon turn positive again, as it typically has been throughout our history. If our ability to pay interest on reserves and other liabilities were eliminated, the Fed would lose control over rates."

In all fairness, who could have possibly expected inflation to spike as the central bank's balance sheet expanded from $3.8 trillion to $9 trillion and M2 Money Supply expanded from $15.4 trillion to more than $21.7 trillion? (I'm looking at you, Congress, as much as the Fed....) Oh, by the way. M2 Money Supply is currently running at more than $22.2 trillion. Just thought I'd mention that.

There are reasons for this, such as increased credit creation via the wonders of fractional banking and increased holdings of Treasuries (federal borrowing). That said, gross domestic product has been on the rise of late. The increase in money supply as the Fed draws liquidity out of the system is "sort of OK," as long as economic activity or growth continues to outpace that increase. There is definitely inflationary risk involved here.

On That Note...

Powell did address the economy.... "While the unemployment rate remained low through August, payroll gains have slowed sharply, likely in part due to a decline in labor force growth due to lower immigration and labor force participation. In this less dynamic and somewhat softer labor market, the downside risks to employment appear to have risen." Powell did not comment on where the Fed Funds Rate will go from here.

While Powell did not comment on the path of short-term interest rates, others sure did. On Tuesday, Fed Gov Michelle Bowman, who is a candidate to take Powell's job in May, said 'I continue to see two more (quarter-percentage point) cuts before the end of the year." 

In addition, also on Tuesday, Boston Fed Pres Susan Collins commented, "With inflation risks somewhat more contained, but greater downside risks to employment, it seems prudent to normalize policy a bit further this year to support the labor market." Boston does hold 2025 policy voting rights.

Marketplace

Markets embarked on another wild ride on Tuesday. After taking the Powell comments in stride and generally working out from an early morning selloff, markets had found themselves in rally mode until trade tensions between the U.S. and China perked up again. Early on Beijing had placed sanctions on the U.S.-based shipping businesses of South Korea's Hanwha Ocean.

Later on, Pres. Trump fired back on social media, but in retaliation for a lack of Chinese purchases of U.S. soybeans (which actually is a major problem). China has been choosing to purchase agricultural commodities from farms in Brazil and Argentina over U.S. farmers. This caused a rapid selloff that appeared to stabilize just ahead of the closing bells up at Times Square and down at 11 Wall Street.

This has left Wall Street (the industry, not the location) wondering just where the off-ramp is concerning trade with China as we head deeper into earnings season and the supposed meeting between the leaders of the world's two largest economies at month's end in South Korea approaches. The S&P 500 gave up 0.16% for the session as the Nasdaq Composite suffered a 0.76% loss. The Philadelphia Semiconductor Index was slapped around for 2.28%, led lower by Nvidia  (NVDA) , Intel  (INTC)  and Marvell Technology  (MRVL) .

Strength was found, however, in U.S. Treasury markets, in the KBW Bank Index and in the small to midcap indexes. The S&P 600 and Russell 2000 were up 1.49% and 1.38% respectively. Wells Fargo  (WFC)  was the top performer (+7.2%) in the S&P 500 after reporting third quarter earnings.

Breadth

The broader market was a lot stronger than the headlines suggested. Nine of the 11 S&P sector SPDR exchange-traded funds closed out the Tuesday session in the green, led by the Staples  (XLP) . The Staples were supported at least in part, by a 13.6% gain made by Albertsons (ACI and not by a general rotation into defensive type names. Cyclical sectors such as the Industrials  (XLI) , the Financials  (XLF)  and the Materials  (XLB)  all scored gains of at least 1% for the day. Technology  (XLK)  was obviously the big loser.

Winners beat losers by a rough 2-to-1 margin at the NYSE and by about 5 to 3 at the Nasdaq. Advancing volume took a 67.4% share of composite NYSE-listed trade and a 64.6% share of composite Nasdaq-listed activity. There was even increased aggregate trade. Activity increased by 8.4% on a day-over-day basis across Nasdaq-listings and by 6.9% across NYSE-listings. Activity picked up across the membership of the S&P 500 as well.

Just one thing. The headline indexes were lower, so no bullish return to trend. That said, the necessary pause in between a Day One and a Confirmation Day can be several days long, so we are not yet out of the woods created by Friday's broad market weakness.

Holy Toledo, Batman!

On Tuesday afternoon, Bloomberg News reported that Microsoft  (MSFT) planned to rent data center capacity from Nscale in a new facility in Portugal located south of Lisbon. The facility would use 12,600 Nvidia  (NVDA)  Blackwell Ultra GPUs. For those unaware, Nscale is a U.K.-based hyperscaler that last month announced a partnership with Microsoft, Nvidia and OpenAI to develop 50 megawatts of AI capacity at Loughton, which is a suburban area of London, England. Nscale also, last month, completed a $1.1B fundraising campaign, which was the largest of its type in European history.

Early Wednesday morning, Nscale has apparently signed an expanded deal with Microsoft for approximately 200,000 Nvidia GB300 GPUs to be deployed across the U.S. and Europe in one of the largest AI infrastructure deals ever done. This deal also involved Dell Technology  (DELL) and will be delivered through Nscale's joint venture and owned operations with Aker ASA (AKAAF). This is an expansion of an already existing deal between Nscale and Microsoft to deliver the largest AI supercomputer in the UK.

There's More...

Oracle  (ORCL)  announced plans on Tuesday to deploy 50,000 Advanced Micro Devices  (AMD) Instinct MI450 GPUs starting in Q3 2026. On this deal, Karan Batta of Oracle Cloud Infrastructure told CNBC, "We feel like customers are going to take up AMD very, very well -- especially in the inferencing space." 

Hmm, sounds exactly like what we've been telling readers in this column for months now. Don't look now, but Broadcom  (AVGO)  is set to soon launch its new Thor Ultra networking chip for AI data centers that has been designed to compete directly against chips designed by both Nvidia and AMD.

News

- On Tuesday, Boeing  (BA) won a series of multi-year contracts worth a rough $2.7 billion to produce more than 3,000 Patriot Advanced PAC-3 interceptor missiles by 2030. The work will be done in partnership with Lockheed Martin  (LMT) . The PAC-3 Seeker is apparently adept at detecting, tracking and destroying everything from ballistic to cruise to even hypersonic weapons. I did not know that the U.S. Army could award contracts of this size during government shutdowns, but I guess we learn something every day, don't we?

- Walmart  (WMT) , on Tuesday announced a new partnership with OpenAI, which will allow customers of both Walmart and Sam's Club to shop and buy goods directly on ChatGPT using Instant Checkout. Etsy  (ETSY) and Shopify  (SHOP) are already apparently on board with Instant Checkout. Being the last of my kind, an old man who actually goes to stores, I expect that someday, I may actually have to evolve.

Economics 

(All Times Eastern)

07:00 - MBA 30 Year Mortgage Rate (Weekly): Last 6.43%.

07:00 - MBA Mortgage Applications (Weekly): Last -4.7% w/w.

08:30 - Empire State Manufacturing Index (Oct): Expecting -3.9, Last -8.7.

4:30 p.m. - API Oil Inventories (Weekly): Last +2.78M.

The Fed

12:10 p.m. - Speaker: Atlanta Fed Pres. Raphael Bostic.

12:30 - Speaker: Reserve Board Gov. Stephen Miran.

1:00 - Speaker: Reserve Board Gov. Christopher Waller.

2:00 - Beige Book.

Today's Earnings Highlights 

(Consensus EPS Expectations)

Before the Open:  (ABT)  (1.30),  (ASML)  (5.35),  (BAC)  (.95),  (MS)  (2.07),  (PNC)  (4.05),  (PGR)  (5.04),  (SYF)  (2.21)

After the Close:  (JBHT)  (1.46), SNV (1.35),  (UAL)  (2.68)

At the time of publication, Guilfoyle was long NVDA, INTC, WFC, MSFT, BA equity.