Jackson Hole focus: is Nvidia is more important than the Fed? As we get to the end of the trading month for the UK, the focus will shift from the corporate back to the macro. Nvidia’s stunning 8% rally after its Q2 earnings report reignited the AI trade on Thursday, with a broad-based rally that lifted the Nasdaq 100 by more than 1.4% and the S&P 500 by 0.7%, led by a 3% gain in the tech sector. World waits for Warsh to speak The rally could pause on Friday, and futures prices are pointing to some small declines for Nvidia and a 0.3% drop in the Nasdaq 100 later today, as the focus shifts to Jackson Hole and the speech from Kevin Warsh that the whole world is waiting for.

Huang’s warning on memory costs Thursday’s rally is worth revisiting. Nvidia’s CEO essentially jump-started the AI trade when he said that the company would double its supply commitments to $279bn, primarily due to memory costs. However, the memory chip makers did not benefit from this rally. SanDisk and Micron saw their share prices surprisingly fall on Thursday. This is possibly due to Huang’s warning that the AI build out could slow down due to memory costs, which could put pressure on these companies to keep their prices in check in future. Software stocks roar back to life Memory makers were sidelined by software stocks.

Salesforce and Crowdstrike surged independently of Nvidia’s earnings. Salesforce was higher by more than 20%, after it announced an upgrade to its revenue and profit forecasts for this year. However, the main trigger for its best-ever daily performance was the announcement of a tie-up with Anthropic’s Claude, creating a ‘Claudeforce’ plugin to boost its software capabilities. AI trade not just about Nvidia This has put to bed fears that AI will replace the world’s largest legacy software firms. In Q1 software giants sold off sharply, however, since April they have surged. The ishares Software ETF is up 50% and is making new YTD highs. This suggests that the AI trade is no longer just about Nvidia. Software firms are teaming up with Anthropic and OpenAI to co-create products that use AI models.

This is a powerful driver of growth for the software giants. Enterprise software stocks have something the AI model makers don’t: customers. Anyone who thought that these companies were dead or would be slashing jobs in the future, need not have worried. Today’s price action shows that they are more alive than ever, and they are likely to be creating jobs in the future. Focus shifts to Warsh Now that the Tech trade is on a more solid footing, the focus can shift to Jackson Hole, where global central bankers have gathered for the Federal Reserve’s annual conference. The theme of this year’s conference is the effects of technical innovation on global payments systems and on economic policy making.

However, from a market perspective, the focus is on Fed chair Kevin Warsh’s speech, which will take place at 1500 BST. The question for investors is whether this speech will be worth waiting for ahead of a UK bank holiday weekend? In the past, Fed governors have used this address to signpost the future direction of monetary policy. Due to this, it has always been a market-moving event, directly impacting the price of bonds, the dollar and gold. What will Warsh say if he doesn’t give forward guidance? However, there is virtually no chance that Warsh will follow in his predecessors’ footsteps, since he has said on multiple occasions that he does not think forward guidance is useful outside of economic crises. So what will he say if he doesn’t offer forward guidance? Warsh to focus on changes at the Fed This speech could focus on bigger issues, such as how he plans to run the world’s most important central bank, and also what changes he will make and when. While not offering direct guidance on the future of interest rates, everything he says will be scrutinised by investors, and changes that he plans to make could still trigger market volatility. Warsh has set up 5 task forces to consider a new framework for how the Fed operates. He is expected to use today’s address to tell financial markets about:

1. Changes to the Fed’s communications strategy
2. Balance Sheet policy in the wake of recent bond market turbulence
3. How the Fed will improve the quality of US economic data that it collects
4. How gains in AI will change how the Fed looks at and assesses the US economy
5. Update the market on how the Fed will react to the drivers of inflation as the US and global economy evolve

Interest rates and inflation in focus There is speculation that Warsh, who is concerned about inflation being above target but has voted for US interest rates to remain on pause, could dismiss the view that raising interest rates will quell inflation. Primarily this is because the main drivers of inflation are international and not domestic. The inflation outlook is also impacted by the AI build out and rapidly rising costs in this space. This is also something the Fed may not want to hold back with increasing rates. Are hawkish and dovish relevant in the era of Warsh? It is hard to predict what Warsh will say and what tone he will strike. If he doesn’t give forward guidance then can anything he says be classified in the old way of ‘dovish’ and ‘hawkish’. A patient tone with rising inflation could boost dollar alternative assets like gold and crypto, while weighing on the dollar, and ironically pushing up bond yields, as investors express concern about rising inflation.

The backdrop to this meeting is fairly benign. US stock markets are higher by approximately 12% this year, with the Nasdaq up 6% in the past month. Although inflation is rising and job growth is falling, the inflation picture is impacted by global events, and the jobs data is more nuanced, with recent jobless claims falling, and remaining at low levels. Bond yields have stabilised after recent ructions, and the 10-year Treasury yield is down by 6bps in the past month. The dollar is lower by 2% on a broad basis in the past month, but has stabilised this week, while the gold price has had one of its best-ever months and is higher by 14%. If Warsh gets his way, then his speech will not be market-moving. As we said earlier this week, Nvidia is more important than the Fed at this stage of the AI revolution. Kevin Warsh should be happy about that. Chart 1: Salesforce’s record-breaking day

Source: XTB