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Around the Hill Volume 1 - An Uncertain Number of Uncertainties & AI Everywhere

Markets remained volatile as uncertainty reigned around the future path of inflation, economic growth, the labor market, fed policy and the health of the banking system. Federal Reserve Chairman Jerome Powell’s congressional testimony hinted at a higher terminal Fed Funds rate and opened the door to bigger rate hikes. And several companies made big announcements around generative artificial intelligence (AI). Let’s dive in…

What’s Driving Markets? 

The health of the U.S. banking system remains at the forefront of headlines. This is driving concern that the spillover effects from select bank failures could bring down others. It’s also raising red flags that the tightening of credit conditions as result of these failures could drag economic growth lower. So far, three regional banks in the U.S. have failed with others including First Republic, PacWest and Western Alliance facing stress caused by deposit outflows.

Regional bank stocks were volatile last week, with selling pressure picking up as Treasury Secretary Janet Yellen said in a congressional testimony Wednesday that regulators were not looking to provide blanket deposit insurance to stabilize the sector. We talked about FDIC deposit protection here and noted the limits on insurance. We also noted how the larger U.S. banks’ balance sheets are more resilient to these isolated shocks and that’s true on both sides of the Atlantic

At the same time, the Federal Reserve hiked the Fed Funds target rate by 25 basis points (1 basis point = 0.01%) and Chairman Jerome Powell said that the central bank remains committed to taming inflation despite slightly softer language around future rate hikes. As the markets digested hot inflation readings earlier in the year, hawkish commentary from Powell at his March 7 congressional testimony and then a cascade of bank failures and their knock-on economic effects, it has significantly downshifted expectations of further rate hikes and now expects that the Fed is nearly done raising rates.

Source: Bloomberg Market Implied Policy Rate, Roundhill Investments, March 2023

Notable & Quotable

Everything Everywhere All at Once won the Academy Award for Best Picture recently. Well, this week it seemed that generative AI was everything everywhere all at once. With the Game Developers Conference ongoing in San Francisco, many game companies including Roblox, Unity, Ubisoft and Tencent touted their use of AI tools. For more on how we think generative AI is set to impact the video game industry, you can read our blog here.

Nvidia too announced a whole suite of AI products and services. CEO Jensen Huang sees the launch of chatGPT and other generative AI tools as the “iPhone moment” for the technology. Since ChatGPT’s release on November 30, 2022, Nvidia shares are up 61.5% as investors expect the growth of this technology to drive increased demand for its high-end AI chips.

Not to be outdone by games companies, Adobe announced a suite of AI tools coming to its core creative products, while rival Canva did the same. JPMorgan analysts see generative AI tools reducing the cost of content creation and increasing productivity.

Also in gaming, Rovio shares fell 8.5% on March 22 after the company said it had ended non-binding preliminary talks with Playtika over a potential acquisition. Previously, Playtika had lodged two offers for Rovio but it appears the two could not agree on terms. Rovio said it is still exploring options with certain other parties.

Tencent, the world’s largest gaming company by revenue, posted fourth quarter and full year 2022 results that were mostly in line with analyst expectations. Still, the results demonstrated that Tencent is exiting a tough year in a better position to grow more profitably now that significant regulatory headwinds have passed and as the outlook for the global gaming industry improves amid easing year-ago comparables.

Meanwhile, Coinbase shares slumped 16.7% on March 23 after the company said it received a “Wells Notice” from the Securities and Exchange Commision. Per Bloomberg, this is a notice of intent by the SEC that it plans to bring an enforcement action against the company. The action is part of a broader regulatory crackdown on crypto companies and the SEC’s ambition to crack down on what it deems to be violations of securities rules. 

What the Markets Said?

Stocks rose last week, with the S&P 500 Index, the Dow Jones Industrial Average and the Nasdaq Composite Index rising.

Source: Bloomberg, March 2023

Past performance is not indicative of future performance. The Index returns above are presented for illustrative purposes only. The index returns presented herein do not represent the results of actual trading in investable assets and securities. Index returns do not consider other expenses you may incur when investing or trading an investment strategy, which include, but are not limited to, advisory/management fees, custodian fees and trading fees/commissions. You cannot invest directly in an index. 

Among the S&P 500 sectors, energy, communications services and information technology posted the highest return last week. Real estate and utilities posted the lowest returns.

Source: Bloomberg, March 2023

Looking at select bond and credit market indicators, U.S. government bond yields fell last week but the 2s-10s curve shifted modestly after sharp contractions in the prior few weeks. Investment grade and high yield credit default swap spreads narrowed last week.

Source: Bloomberg, March 2023
Note: Bond yield returns quoted in basis points; 2-year/10-year bond yield spread value and return quoted in basis points (1 basis point = 0.01%)

In the commodities space, oil futures rose last week while natural gas futures slipped. The VIX Index fell as the ICE BofA MOVE Index, a similar measure of bond market volatility, also declined.

Source: Bloomberg, March 2023

What Economic Data Said Last Week?

Source: Bloomberg, March 2023

What Earnings Said Last Week?

Source: Bloomberg, March 2023

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