Jensen's Jolt

A key macro takeaway from Jensen’s is robotics and autonomous driving, the "physical AI.” The market for this technology is “just $35 billion,” but it is projected to grow to $75 billion in revenues in a few years.

Markets took Jensen’s speech as bullish for the economy as the physical aspect of AI requires further [physical] investment in infrastructure, which is still less than $1.4 billion annually for robotics and $4 billion for autonomous driving.

In the pre-market, semis, robots, and autonomous ETFs are up 1.5% to 3%, reflecting investor sentiment of the following investment phase beyond data centers and the anticipation of reshoring activity.

The real yield, a proxy for (real) GDP, is tracking the S&P semi-equipment index, and this relationship could strengthen as NVDA accelerates the rollout of the Cosmos platform to power robots and autonomous driving (Figure 1).

Markets are trading the investment-driven economy theme. Coupled with a front-loaded corporate bond issuance calendar ($250 billion expected total for January), the focus is on ISM services and potential changes at the Fed, such as Michelle Bowman’s rumored candidacy for bank regulatory supervisor.

Figure 1: Semi-equipment index and real yield (%)

Source: NYSE, US Treasury

Michelle Bowman is an interesting pick because she is the last-standing hawk on the FOMC. She has consistently called for a hike if inflation is not moderating. Suppose she takes the role of head of bank supervision (which she is highly qualified for, given her bank resume).

In that case, her hawkish view of Fed policy may be 'diluted' because of a different focus (banks) on interest rates affecting the economy. The already cautious hawkish tone in recent speeches could be watered down if Bowman is the next Fed's bank regulatory supervisor.

Yet Jensen’s speech affected markets with a ripple in anticipation of the next Supercycle; Micron is up 3.5% and named a key supplier, and autos, industrials, semi-equipment, and global tech in Japan and Europe rallied by 2.5 percent on average (even in China where CSI 300 Tech index was up by nearly 5%). At the same time, regional and investment banks added 1 percent to the Bowman headline.

Thus, there is tension. The economy is on the cusp of accelerating to a higher growth path, closer to 5% GDP to match China’s growth, while the Fed is cautious as a compromise not to sound (too) hawkish. The dollar has lost steam against emerging markets, which has seen the Peso, Won, and Real up by 2 percent year-to-date.

The yield curve has been steepening as a sign of pricing in the potential of higher GDP in 2025. However, the curve is not steepening everywhere; an inversion remains between T-bills and 1Y/2Y notes at the shorter end. The Bloomberg Dollar Index, which includes Peso, Yuan, Won, and Rupee, is depreciating (Figure 2).

I.e., bond markets romanticize that a hike is not impossible (hence T-bill-Note curve inversion), while the Fed may not be as hawkish (which weakens the dollar).

Figure 2: 1M/1Y curve and Dollar Index

Source: US Treasury, Bloomberg

This is a good cocktail for unloved sectors like materials, energy, healthcare, copper, and steel to catch up from last year’s underperformance. These sectors are making a turn (see Figure 3), which is the latest sign that expectations of economic acceleration are heightening.

Regards,

Ben

Figure 3: Unloved sectors turning

Source: VanEck, iShares, Global-X