The Comet! He is on his way,
And singing as he flies;
The whizzing planets shrink before
The spectre of the skies
Ah! Well may regal orbs turn blue,
And satellites turn pale,
Ten million cubic miles of head,
Ten billion leagues of tail!
-- "The Comet (excerpt)" Oliver Wendall Holmes Sr. (1832)
Shooting Star
I know. I get it. We all want to talk about Nvidia ( NVDA) this morning, and we will. Nvidia has been a great victory for us. Good thing we took a little something off in the name of risk management ahead of the event, right? Gee whiz.
Regardless, the overnight move, which has likely been exacerbated by those covering short positions, has put the name back into my top-five holdings by weighting, even with that misguided reduction.
Rock and roll. We'll get to Nvidia, but between now and then, we have some wood to cut, Let us begin.
Negative Watch?
On Wednesday evening, ratings agency Fitch placed the United States AAA long-term foreign-currency issuer default rating on "negative watch." The negative watch is reflective of "increased political partisanship that is hindering resolution to raise or suspend" the nation's legal debt limit. Fitch did make note that it still expects legislators to reach a resolution prior to the "x-date", but that the risk of a deal not being reached had increased.
Fitch also stated that the agency expects the U.S. to remain AAA rated throughout and that the federal government failing to make full and timely payments on debt securities remains a low probability event. Fitch currently projects a general government deficit of 6.5% of GDP for this year and 6.9% of GDP for 2024.
On that note, JPMorgan ( JPM) chief U.S. economist Michael Feroli wrote to clients on Wednesday, "We still think the most likely outcome is a deal signed into law before the X-date, though we see the odds of passing that date without an increase in the ceiling at around 25% and rising. In this latter scenario, we think there is a very high likelihood (that) Treasury would prioritize principal and interest payments." Feroli added, "While doing so would avoid a technical default, there would still be several adverse effects, including a likely downgrade of the US credit rating."
Uncertainty
The Federal Reserve Bank's FOMC delivered a tenth consecutive increase to the target range for the Fed Funds Rate on May 3. The Minutes from that two-day Fed policy meeting were released on Wednesday afternoon, and show a committee that is growing less unified in where "they" as a group think that future policy should be headed. The Minutes flat out read: "Participants generally expressed uncertainty about how much more policy tightening may be appropriate."
With the Fed Funds Rate at 5% to 5.25%, which is the highest its been since 2007, the Fed has been out in force of late, staking out their positions. Last week, Dallas Fed President Lorie Logan made the case that not enough progress has been made in the fight against consumer-level inflation to consider hitting the pause button on policy tightening. Since then, St. Louis Fed President James Bullard as well as Fed Governors Christopher Waller and Michelle Bowman have all made hawkish-sounding statements.
However, this past Friday, Fed Chair Jerome Powell laid down hints that he might support "skipping" a meeting instead of announcing some kind of "pause" as a means toward permitting the lag effects of more than a year of policy tightening in D.C. to catch up on Main Street, USA. Fed Governor Philip Jefferson, who is the Vice Chair "apparent," and Atlanta Fed President Raphael Bostic in recent public appearances have seemed to back this approach.
I am not a voting member of the FOMC, nor have I ever been considered for such a position. That said, this is the path that I would follow. We don't know how far behind Washington, Main Street is, but it's a fair bet that the gap is at least six months long. Continuing to blindly increase short-term interest rates, while the Fed's quantitative tightening program continues on and while we can not be sure that the regional banking semi-crisis has been fully handled would be akin to groping around in the dark for something unseen. That something unseen just might be a staircase.
Cyber Threat
On Wednesday, tech giant Microsoft ( MSFT) warned that a state-sponsored Chinese hacking group code-named "Volt Typhoon," active since mid-2021, had stealthily gained access to critical infrastructure organizations in Guam and the U.S. with the probable intent of being able to disrupt U.S.-Asian communications in the event of a crisis. The report reads, "Microsoft assesses with moderate confidence that this Volt Typhoon campaign is pursuing development of capabilities that could disrupt critical communications infrastructure between the United States and Asia region during future crises."
Apparently, this Chinese state-sponsored hacking group has been able to infiltrate key organizations through the exploitation of unknown vulnerabilities in the FortiGuard cybersecurity platform. Targeted organizations span the manufacturing, construction, maritime, government, and education spaces.
Microsoft has notified targeted or compromised customers and urged them to close or secure their accounts. Note that Fortinet ( FTNT) was one of the few cybersecurity stocks that traded lower on Wednesday after Palo Alto Networks ( PANW) had reported a nice quarter and raised expectations on Tuesday night.
Does this qualify as some kind of "act of war"? I don't think we can go that far without much more knowledge. It certainly is adversarial. That said, for me, for investors, this cements the idea that the weakness in the large defense contractor stocks in response to the congressional in-fighting over the debt ceiling is probably an opportunity for those who missed out on the 2022 run in those names (and for the rest of us to reload).
Snowstorm
Ahead of Nvidia's earnings release on Wednesday evening, Wall Street was hit by a blizzard. Cloud-based data-warehouse entity Snowflake ( SNOW) reported a first quarter that beat Wall Street expectations for both the top line and adjusted bottom line.
Revenue growth printed at a still hot, but clearly decelerating 47.6% annual growth rate. Remaining performance obligation (RPO) grew 31% to $3.4B, which Wall Street found disappointing.
That's not all that Wall Street found disappointing. The company projected product revenue for the current quarter of $620M to $625M versus consensus view of $686M. For the full year, Snowflake sees product revenue of $2.6B. This also measured up poorly against the $2.87B that the community of sell-side analysts had in mind, despite the 34% growth implied.
The stock that had been approaching its early 2023 highs, is now down 14% in overnight trade.
Note To Readers...
Nvidia ( NVDA) is going to require its own piece this morning. I will be back as soon as I can this morning with that article on Real Money. Rock on.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 250K, Last 242K.
08:30 - Continuing Claims (Weekly): Last 1.799M.
08:30 - GDP Growth Rate (Q1-rev): Flashed 1.1% q/q SAAR.
10:00 - Pending Home Sales (Apr): Expecting 1.4% m/m, Last -5.2% m/m.
10:30 - Natural Gas Inventories (Weekly): Last +99B cf.
11:00 - Kansas City Fed Manufacturing Index (May): Expecting -27, Last -21.
The Fed (All Times Eastern)
10:30 - Speaker: Boston Fed Pres. Susan Collins.
