Cooling Down

The week started off with news that the US Senate passed the Democrats’ landmark tax, climate, and health care bill – a move that’s set to speed up the country’s transition to clean energy sources. But the biggest news of the week was that US inflation decelerated in July by more than expected, which sent markets rallying. Elsewhere, we had earnings updates from SoftBank, Palantir, and Nvidia, with the last giving us important clues about crypto mining demand. Find out why.

Macro

The latest inflation report out of the US this week showed consumer prices increased by 8.5% in July from a year ago. On paper, 8.5% is pretty high and surely isn’t a cause for celebration, but the figure was actually good news for two reasons. First, it was a marked deceleration from the 9.1% gain in June, which was the highest rate of inflation in four decades. Second, it was lower than the 8.7% economists were expecting. Economists had also expected consumer prices to increase by 0.2% in July compared to the month before, but the data showed that they were unchanged from the previous month, as a 5% decline in energy prices offset higher food and shelter costs.

After the release, traders reduced the odds of the Fed boosting interest rates next month by three-quarters of a percentage point. That sent the prices of stocks and crypto up, and the dollar and bond yields down. But traders might not want to get ahead of themselves. See, the Fed said it wants to see months of evidence that prices are cooling, especially in the “core inflation” measure, which strips out volatile energy and food prices. And this week’s inflation data showed that on a month-on-month basis, core consumer prices increased by 0.3% in July, while the annual core inflation rate of 5.9% was unchanged from the previous month.

Stocks

Japanese conglomerate SoftBank reported its biggest-ever quarterly loss on Monday. The firm’s Vision Fund segment – which manages the world’s biggest tech-focused investment funds – continues to be pummeled by a sharp selloff in tech stocks amid rising interest rates. It posted a record $17.2 billion loss last quarter, caused by big drop-offs in the value of key holdings like DoorDash, Coupang, and SenseTime.

SoftBank’s shares barely budged after the news, probably because investors were already anticipating a big loss after the Nasdaq 100 index – a popular proxy for tech stocks – fell 22% last quarter. But investors are probably wondering what was the point of the bank’s big push into tech investments in the first place: SoftBank’s share price is now close to where it was five years ago, before the Vision Funds even existed – and that’s despite a series of aggressive stock buyback programs to help prop up SoftBank’s share price.

Software firm Palantir – which makes analytics tools for major corporations and the defense industry – also gave a disappointing update on Monday. The firm reported a surprise loss for the second quarter after the value of its investments in special purpose acquisition companies – or “SPACs” – fell (Palantir pumped more than $400 million into SPACs last year). It also gave a disappointing revenue outlook for the current quarter, which Palantir put down to the “lumpiness” and unpredictability of government contracts. Investors had heard enough: they sent the firm’s shares 15% lower after the announcement, meaning it’s now dropped almost 50% this year.

Commodities

Over the weekend, the US Senate passed the Democrats’ landmark tax, climate, and health care bill, also known as the Inflation Reduction Act. The bill includes some of the most significant climate change legislation enacted in the US, with more than $250 billion dedicated to climate and clean energy programs. These include production tax credits for electricity generated from renewable sources, investment tax credits to build clean technology manufacturing plants, consumer tax credits for the purchase of EVs, and more.

The new bill would put the US far closer to the Biden administration’s goal of halving economy-wide CO2 emissions by 2030 versus 2005 levels. In fact, an analysis by Rhodium Group estimated that the bill could put the US on track to reduce emissions by 31-44% compared with 2005 levels by 2030, from a 24-35% reduction without the legislation. That’s expected to further displace demand for traditional fossil fuels like oil, natural gas, and coal.

Crypto

Nvidia announced its preliminary financial results on Monday. The world’s biggest chipmaker by market value expects its second-quarter revenue to be around $6.7 billion – a 19% drop from the quarter before and significantly below the $8.1 billion it had previously predicted. But wait, what does this have to do with crypto? Allow us to explain.

Nvidia blamed its poor preliminary results on significantly weaker sales at its gaming division – the firm’s largest, accounting for almost 60% of its revenue last year. Nvidia expects its second-quarter gaming revenue to be around $2 billion – down by 44% from the quarter before and by a third on a year-on-year basis. But is this really the result of consumers purchasing fewer high-end PCs and gaming consoles (as the company claims), or the result of something bigger – say, weaker demand from crypto miners?

Back in May, the US Securities and Exchange Commission (SEC) fined Nvidia for unlawfully obscuring how many of its graphics cards were sold to crypto miners. The SEC claims that Nvidia misled investors by reporting a huge boost in revenue related to “gaming”, hiding how much its success relied on the far more volatile crypto market.

So with the prices of the two most heavily mined coins (bitcoin and ether) down by over 50% this year, Nvidia’s weak gaming performance might be a result of significantly fewer sales to crypto miners. Lower crypto prices, after all, lower the financial incentives earned by miners, pushing many of them to exit the market. And in ether’s case, mining demand is set to drop significantly irrespective of what happens to its price. That’s because the Ethereum blockchain is expected to completely move away from mining on the 12th of September. That’ll leave Nvidia’s chips even less in demand, and could cause this so-called “gaming revenue” to drop further.

Next week

Second-quarter earnings season continues to wind down but there are still a few big names reporting next week including retail giants Walmart and Home Depot. On the economic front, we have the latest labor report, inflation figures, and retail sales data coming out of the UK, industrial production numbers out of the US, and the first estimate of second-quarter GDP for the eurozone. Traders will be particularly interested to see how badly the eurozone economy has been hit by the outbreak of war and resulting surge in energy prices.