Key Points
- The delayed September jobs report shows a gain of 119,000 jobs.
- Prospects for a Fed rate cut in December grow increasingly unlikely.
- NVIDIA’s revenue growth raises concerns over AI capital spending.
- Technology stocks fell sharply, along with copper and uranium miners.
The S&P 500 plunged amid growing concerns about AI capital expenditure. The index jumped higher at the open, after Nvidia’s stellar results, but then closed below support at 6550, signaling a correction. Follow-through below 6500 would offer a target of 6200.
Nvidia reported stellar revenue growth and guided fourth-quarter revenue to $65 billion.
CEO Jensen Huang said that Nvidia has $500 billion in orders for its AI chips in 2025 and 2026 combined, and that number is expected to grow.
What’s more, four customers accounted for 61% of Nvidia’s sales in the third quarter, up from 56% in the second. That suggests increased concentration risk for Nvidia as well as the chip buyers.
These are big bets. The eventual productivity gains may be enough to make the outlay worth it. But we won’t know for a while, and the bigger the spend, the higher that bar for profitability and the greater the risk that investors will grow impatient. (Reuters)
The Invesco Nasdaq 100 ETF (QQQ) similarly broke support at 590, signaling a correction to test support at 550.
The forward PE of the S&P 500 Tech sector is at its highest since 2002, warning that market pricing is extreme.
Financial Markets
Bitcoin broke support at 90K, warning of a significant liquidity contraction in financial markets.
The Treasury general account (TGA) remains high, offering no relief.
Prospects for a December Fed rate cut are declining. The 6-month T-Bill discount rate jumped above the current lower limit of the Fed funds target after the last FOMC meeting and has remained there since then.
Minutes of the last FOMC meeting reflect a deeply divided Fed, with three Trump appointees — Miran, Bowman, and Waller — pushing for rate cuts. However, the majority are more cautious:
“Most participants noted that, against a backdrop of elevated inflation readings and a very gradual cooling of labor market conditions, further policy rate reductions could add to the risk of higher inflation becoming entrenched or could be misinterpreted as implying a lack of policymaker commitment to the 2 percent inflation objective….”
“Many participants expressed concerns that overall inflation had been above target for some time and had shown little sign of returning sustainably to the 2 percent objective in a timely manner….”
“Many participants suggested that, under their economic outlooks, it would likely be appropriate to keep the target range unchanged for the rest of the year.”
Labor Market
The BLS reported an increase of 119 thousand jobs in September after a dismal four months from May to August. We are suspicious of the BLS labor figures, however, after President Trump fired Commissioner Erika McEntarfer in August, claiming that the jobs numbers were “rigged.”
Growth in aggregate hours worked remains below 1.0%, indicating low economic growth, which will likely be reflected in Q4 GDP numbers.
Continued unemployment claims increased to almost 2 million, while the unemployment rate rose to 4.4%, both reflecting a reasonably healthy but deteriorating labor market.
Of greater concern is the loss of 100 thousand jobs in cyclical sectors since February. Employment in the three sectors — manufacturing, construction, and transport and warehousing — accounts for the largest job losses during a recession and serves as a leading indicator of the economy.
Gold & Forex
Gold is consolidating above support at $4,000 per ounce.
The Japanese yen is testing resistance at its January high of 158, with rising Trend Index troughs indicating long-term selling pressure.
Energy Materials
Copper miners retreated as concerns over AI capex grow, with the Sprott Copper Miners ETF (COPP) breaking support at 28. Follow-through would confirm a target of 25.
A breach of support at 52 confirms a similar decline in the Sprott Uranium Miners ETF (URNM), with a target of 46.
Lithium miners are enjoying a strong uptrend, but the LITP ETF retreated below 12 on Thursday, suggesting a correction.
Conclusion
Stocks are falling as liquidity contracts, but indications are that this is a secondary correction. The market is reassessing the sizable commitment to AI capital expenditure and the risk that hyperscalers may not earn a high return on their investment. Technology stocks were sold off, as well as copper and uranium miners. The miners stand to gain from the exponential growth in data center energy demand.
There are no signs of a structural shift, with gold consolidating above $4,000 per ounce and the Japanese yen steady at 158 against the dollar.
The BLS reported 119K job gains in September, but continued unemployment claims are rising. The unemployment rate increased to 4.4%, but the greater concern is the loss of 100K jobs in cyclical sectors since February. Job losses in manufacturing, construction, and transport and warehousing are typical triggers of a recession and serve as leading indicators of the economy.
Prospects for a Fed rate cut in December are declining.
Acknowledgments
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.
