Centerfin Collective Weekly

Weekly Update August 25, 2023

One measure shows 6% economic growth, Powell says not moving inflation target, Nvidia crushes earnings again

One measure shows 6% economic growth

The Atlanta GDPNow tracker, which attempts to forecast the economy's growth rate in real-time, came in at 5.9% for the third quarter. This is accelerating from 5.8% just two weeks ago. This is also significantly higher than most economists predict. With inflation running at 3.1%, this would indicate a real growth rate of close to 3%, which is also significantly higher than anticipated.

  • The GDPNow tracker uses live economic data to calculate the current growth rate of the economy
  • It does not take into account certain adjustments that are made in the official GDP calculation
  • Even still, if the trend is correct, it shows the economy has been accelerating, not decelerating into a recession as many have been predicting
  • This continues to make the case for higher interest rates for longer

Powell says not moving inflation target

Related to the above, at the annual Federal Reserve gathering at Jackson Hole in late August, Chairman Jay Powell reiterated that there is still more to do to bring down inflation, leaving the door open for further interest rate hikes. Several economists have recently called for the Fed to change their inflation target to 3%. During his speech, the Chairman reiterated that their inflation target is 2%.

  • Economists calling for a 3% inflation target are doing so to give the Fed latitude to lower interest rates sooner
  • The Fed seems to understand, however, that if they prematurely lower interest rates, they run the risk of inflation re-accelerating, something that happened in the 1970s
  • Although the sources of inflation today versus the 1970s are different, Chair Powell seems to be of the mind that they need to be sure inflation is heading down to their 2% target before making any changes
  • It seems Chair Powell understands that inflation affects the lower and middle-income classes (vast majority of the population) the most

Nvidia crushes earnings, again

Last quarter, Nvidia shocked the market by blowing away earnings expectations and significantly raising guidance. This week, Nvidia reported its latest earnings, outperforming its prior guidance and raising guidance yet again. The company reported quarterly revenue of $13.5bn, double the prior quarter; they had previously guided to $11bn. They are now guiding next quarter’s revenue to $16bn, which would be triple the level a year ago. They also reported $2.50/share in earnings, up significantly over the prior year.

  • Nvidia builds the chips necessary for the current iteration of artificial intelligence software
  • As the whole world ramps up implementation of AI into their businesses, Nvidia has seen an unprecedented surge in demand
  • The stock was up a stunning 220% year to date going into earnings
  • Some have made an analogy to the massive build-up of telecommunication networks during the early days of the internet (many ended up blowing up)
  • It's notable that the stock failed to hold gains and is currently trading lower than before earnings
  • This may, however, be more of a function of changing market sentiment than the stock itself

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