Straight to Wall Street|Amfa Capital Management Bi Baohong: Inflation rebound may cause the Fed to raise interest rates again The short-term valuation of U.S. technology stocks is too high

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Southern Finance All-Media reporter Zhou Rui and Xiang Xiufang reported from New York

Enter the NYSE and hit Wall Street.

In the week ending August 25, markets focused on Fed Chairman Jerome Powell's speech at the Jackson Hole Annual Meeting. In this speech, Powell once again sent hawkish signals, warning that inflation remains high and that the Fed will continue to raise interest rates if appropriate. On the economic data front, S&P Global said the preliminary U.S. composite PMI, which tracks manufacturing and services, fell to 50.4 in August from 52 in July, the biggest drop since November 2022. The data raised fears of a slowdown in the U.S. economy in the third quarter.

In terms of focus individual stocks, NVIDIA released second-quarter corporate results, the company reported revenue of $13.51 billion, up 101% from last year, and adjusted diluted earnings per share of $2.7, up 429% from last year. The earnings report that exceeded market expectations caused Nvidia's stock price to soar and hit a record high. Before Wednesday's earnings report, Nvidia shares had more than tripled this year and were among the best performers in the S&P 500.

NVIDIA's strong earnings report will continue to drive the technology sector higher? How will the recent economic data be slightly weaker and how will this affect the Fed's monetary policy going forward? What weaknesses have S&P downgraded a number of US regional banks exposed in the banking sector? Recently, "Straight to Wall Street" invited Dr. Bi Baohong, founder and CEO of Amfa Capital Management, to talk about her analysis of macroeconomic data in the past week and the future performance of the technology stock sector. A graduate of Carnegie Mellon University, Dr. Bi worked for many years at Merrill Lynch and McKinsey before founding Amfa Capital Management.

US inflation is expected to rebound in August, and the Fed may need to raise interest rates again

Southern Finance: Economic data released last week were weaker, and the preliminary S&P Composite PMI for August fell to 50.4, lower than expected and the previous reading. Does this reflect weakness in U.S. growth? How will this affect the Fed's monetary policy in September? What signal did Powell's speech send on August 25?

Bi Baohong: These PMI data do indicate a weakening economy, but in fact, I think the manufacturing industry may have been in the process of recession in the last few months. Because since October last year, the US ISM manufacturing PMI has been in a tightening process. On the other hand, the market labor force is tight, and the unemployment rate remains below 4%. Inflation may pick up again in August. If you look at the Cleveland Fed's immediate forecast for inflation, it forecasts a CPI of 0.8% in August, an annualized 10%, which is quite a high value. Of course, this is only a month's data, and you also need to look at the Atlanta Fed's forecast for this third quarter GDP, which is 5.8%, which is also a very high figure. When economic growth is so high, it usually means that inflation data will not be low.

One thing I would also like to point out is that long-term yields [in the bond market] have risen recently. The Fed controls short-term interest rates by adjusting the federal funds rate, but controls long-term yields differently. When market bond yields naturally rise, it may be because it foresees the economy at a higher growth rate. This means that the natural rate of interest is likely to become higher. If that's the case, then that's another factor the Fed might need to consider. All in all, I wouldn't be surprised if the Fed needs to raise rates again later this year. It could be September or November.

The correction in U.S. stocks was expected

Southern Finance: How do you see the trend of US stocks last week and what are the key points of market viewing?

Bi Baohong: There have been a lot of events in the past week that deserve the market's attention, and the stock market has rebounded slightly after the recent correction since early August. First, I think the recent correction was expected and actually healthy, as the market rally was too sharp in June and July.

Looking at economic data, last week's S&P US manufacturing and services PMI (purchasing managers' index) was lower than expected. This suggests that the U.S. economy is weakening. However, the lower-than-expected number of initial jobless claims released on Thursday suggests that the U.S. labor market remains tight.

One of the most closely watched earnings reports may be Nvidia's earnings after last Wednesday's close. The financial report shows that NVIDIA's revenue and net profit have exceeded market expectations. This shows that the recent AI boom continues. This should be good for the stock market, but a tight labor market, rising interest rates and other sectors of economic weakness are not good for the market.

Technology stocks are overvalued in the short term

Southern Finance: In August, the first three technology sectors showed a pullback and cooling, and the artificial intelligence boom seemed to have a downward trend, but last week's revenue and earnings per share in the second fiscal quarter exceeded market expectations, driving the technology sector to rise briefly.

Bi Baohong: Yes, NVIDIA's earnings report is indeed very good. The AI boom is likely to continue for some time. However, this does not mean that there are no concerns in the market.

For myself, there are two concerns: First, if AI can indeed increase people's productivity, it means that there will be some kind of relocation of the workforce. That is, some people will lose their jobs, and new types of jobs will emerge that require people with certain training and skills. In the short term, the labor force may suffer some shocks, which may adversely affect the economy.

Another risk is that technology stocks are overvalued in the short term, and if there is a recession in the short term, these stocks will be more volatile. Those AI-related stocks may have been too hyped, and something like 1999-2000 could happen, such as Amazon, which fell more than 90% from its 1999 highs in 2001 before recovering to today's levels.

As for the later part of the year, it's hard to predict where the stock market will go. The data we mentioned here, they are contradictory. On the one hand, tight labor markets, rising yields, and weak economies in manufacturing and services are headwinds for the market. On the other hand, the AI boom is likely to continue, in addition, the continued fiscal stimulus of the "Biden economy" is also positive for the stock market. I think the direction of the market later this year depends on the development of the real economy.

U.S. regional banks are in a difficult position

Southern Finance: After Moody's downgraded a number of regional banks two weeks ago, S&P also downgraded the credit ratings of a number of regional banks last Tuesday, which led to a lower banking sector, so what is the reason behind the downgrade? What weaknesses does this expose in addition to the banking sector? What are the crises facing the banking sector?

Bi Baohong: Regional banks are currently in a very difficult situation. The main problem is the sharp rise in interest rates in the last year and a half, and on the other hand, the current inverted yield curve. First, when the federal funds rate rises too fast, banks don't have enough time to adjust. Many loans issued by banks, such as mortgages, are based on long-term interest rates. The profit of a long-term loan is determined by the market's long-term interest rate. When the long-term interest rate is relatively low, it means that the bank's income is relatively low, and there is no way to provide higher interest rates to bank depositors.

Since March 2022, the Fed has sharply raised interest rates from 0% to 5.5%. Suddenly, people can get high yields of 5% by buying Treasuries and money market funds, and they move bank deposits to fund accounts or other places where they can earn 5% yields. However, most of the loans from regional banks are issued at very low interest rates. They cannot afford to pay higher interest rates on deposits to depositors. Hence the phenomenon of "bank runs".

In addition, banks typically hold large amounts of Treasury bonds in their portfolios under regulation. In the past, when yields rose, the value of these bonds fell by about 35-40% from their 2021 highs, depending on the maturity. For local banks, especially those that do not properly hedge interest rate risk, they cannot balance corporate debt balances. So you see some of the worst-performing banks go bankrupt in March.

Given the tight labor market and the Atlanta Fed's very high GDP forecast (5.8%), I don't think inflation will fall to the Fed's 2% target anytime soon. That means they may not be able to lower interest rates anytime soon. As long as interest rates don't fall, the troubles of regional banks are unlikely to go away. I think their tough times may last for a while.

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