Central Bank Gaslighting

Yet Another 2000 Analog, Via the DOJ

The Department of Justice (DOJ) just turned up the heat for those looking at the parallel between today’s AI craze and the 2000 tech bubble. They opened a sweeping anti-trust case against Apple last week, strikingly similar to the case they brought against Microsoft in 2000. Then as now, the Justice Department is going after big tech, and in both cases, the threat of breaking up the company was floated. Analogous to the Microsoft allegations, the DOJ is charging Apple with violating antitrust laws. They claim Apple is making it more difficult for customers to move over to a competitor and preventing businesses from offering competing apps that could draw traffic from some of Apple’s products, such as their wallet. The language could have been taken from the Microsoft trial, as the DOJ is accusing Apple of creating an uneven playing field by making it easier for customers to link Apple products than competitors’ products. The Department’s strongest argument may be that Apple is preventing developers from producing apps that work with other apps; a similar tactic used when Microsoft was charged with tying their browser to their operating system.

Apple has fended off previous attempts to accuse it of monopolistic and predatory practices. However, European regulators just hit the company with a $2 billion fine surrounding obstacles the App Store put in place to constrain its music-streaming competitors. The DOJ case is not just attacking the App Store but the entire enterprise. The important thing to keep in mind is this: the timing of the Microsoft case was not the end for the company but the beginning of the end for the 2000 tech bubble. Brace yourself for headlines like “The Jury Is Out” regarding whether Apple’s case will mark a market top.

We Did, But We Didn’t

The Bank of Japan (BoJ) raised its official rate to 0.1%, ending 8 years of negative interest rates. This was expected because inflation exceeded their 2% target for almost 2 years. The central bank warned they would hold off on further rate hikes for the time being to avoid pushing Japan into recession; however, investors were not happy with the lack of details about future rate hikes. The BoJ also announced an end to their “yield curve control policy,” where they buy 10-year Japanese Government Bonds (JGB) to artificially cap the yield to stimulate economic activity in hopes of pushing inflation higher.The problem is that they are abandoning the policy in name only because they will continue to buy $40 billion in JGBs monthly. Market expectations were for a downsized BoJ’s balance sheet, which has grown by 40% over the last 5 years. Investors thought the BoJ would shrink their bond holdings, supporting a rising interest rate policy and a stronger Yen.

Their indecisiveness created a market backlash, and the Yen fell sharply, reversing the rally  fueled by the rate hike anticipation and a clear commitment to future hikes. The Nikkei news service reported a day after the BoJ’s statement that the bank will “weigh their next rate hikes during their July or October meetings if the Yen weakens further.” This announcement was an attempt to limit the damage and shows the Japanese central bank was surprised by the size of the currency drop after the official statement. ” Our translation: last week’s actions have resulted in a loss of credibility for the BoJ. The policy missteps abroad impact our bond market and will cause interest rates to be higher, based on the realization that a major source of Treasury demand will remain absent.

‍Powell: Fuhgeddaboutit

The latest message from the Fed is that the economy is growing, and they will cut interest rates despite higher-than-expected inflation. It is no surprise that the markets celebrated as Powell brushed aside any worry about growth or inflation. However, at odds with the increased core Personal Consumption Expenditure inflation forecast, Chairman Powell told investors that the stronger inflation data in January and February was nothing to be concerned about. He also clarified that the substantial increase in the FOMC’s 2024 economic growth projection was due to a growing labor pool driven by an influx of immigration. Therefore, inflation is rising but does not impede rate cuts. Neither does the economic growth uptick because it is not the type of growth that needs to be contained by hiking rates. The Fed historically has a dual mandate of maintaining price stability and full employment. Still, it appears they are returning to their old policy of trying to sustain growth by increasing wealth through higher stock prices. Given the increased expectation of a 2.6% annual core inflation rate for December, it would have been easy for Powell to communicate that elevated inflation means an extended pause in rate cuts. His view that the economy can tolerate slightly higher inflation in the near term may signal that Powell and the rest of the Fed are buying into the promise of higher productivity thanks to AI. This question remains: what level of inflation is no longer considered tolerable if it continues to rise?

What To Look for This Week

1. This Friday, March 29, the February Personal Consumption Expenditures inflation data is released. Its importance has been deflated after Chairman Powell’s press conference where he said the FOMC can be patient regarding inflation. The more important date is April 10, when the March Consumer Price Index inflation report will contain more timely inflation data.

2. Fed Speakers of note next week: FOMC voters Governor Lisa Cook discusses the Fed’s dual mandate and balance of risks Monday morning, March 25, at 10:30 am E.S.T. and Governor Christopher Waller talks about the economic outlook on Wednesday at 6 pm Eastern. Both could shed light on whether Chairman Powell spoke for the rest of the FOMC when he was so casual about higher inflation during his press conference. The chairman himself speaks with Kai Ryssdal of Marketplace on Friday March 29 at 11:30 E.S.T following the PCE inflation data, in a discussion that will get global markets' attention. 

3. Quarter-End is Friday, March 29. Look for the relative performance of mega-cap tech relative to the market to ascertain if institutional investors are adding to AI-themed stocks this week for reporting purposes and in particular, track NVIDIA. If this group of tech stocks outperforms, investor appetite has not hit a ceiling, which bodes well for further equity upside. Warning signs come on any underperformance.