Generate’s Investment Specialist Greg Smith was on Newstalk ZB with Heather du Plessis-Allan this morning, discussing the market reaction to the Fed's decision to cut interest rates for the third time this year. On the topic of AI he also looks at why investors reacted hardly to Oracle's result and why Disney characters will soon be freely available for video creation following Disney's $1 billion investment in OpenAi. Back home he recaps the mood at Fonterra's AGM after an action-packed year for the Co-op.
Listen here or read the transcript below:
Greg Smith of Generate is with us. Morning, Greg.
Morning Heather.
What do you make of the Fed cut?
It was a hawkish cut. So, yeah, they came through with 1/4 percent reduction, taking the range to 3 1/2 from 3.75%. But it was actually a bit messy. So it was actually the most divided vote in six years. You had nine members wanted a small cut, 2 wanted no cut at all. And perhaps no surprise, Trump's appointee, he actually pushed for a much bigger cut. So the Fed a bit torn at the moment. Jerome Powell that the chair he said well, they're well positioned to wait and see. So don't count on anything in January unless the data actually weakens. Nonetheless, markets liked it, at least the Dow that's up over 500 points. Fed’s own projections, one cut in 2026, another in 2027. So they're not really rushing to reopen the stimulus taps. Inflation remains a sticking point. Powell also made a pointed remark. He said Trump's tariffs are doing much work in terms of keeping inflation high. So no surprise the president responded.
He said actually within minutes that the cut should have been at least double and he's going to pick a more aggressive rate cutter when Powell's terms ends in May. So, and that was interesting, but perhaps no surprise. Just remember though Heather, the Fed’s doing all this with fairly limited data, we had that six-week government shutdown. So that's left them flying partly blind. But yeah, when they meet again in in January, they'll suddenly get 3 months of a backlog on jobs, inflation. So yeah, that could shift the whole conversation. But the investors liked that cut.
Yeah, now we've just been talking about AI and I see Oracle shares have fallen.
Yeah, they have. So rough day for Oracle and a rough day for tech. Obviously a lot of questions around the AI narrative on whether all the spending in particular is worth it. And that's I suppose what investors focused on with Oracle. So shares down over 13%, cloud revenue actually going pretty well, up 34%, infrastructure 68% in terms of the cloud, but numbers short of expectations. So they're actually doing some impressive things.
They're building massive AI data centres for open AI, TikTok, Meta, NVIDIA and they're positioning themselves as an alternative to the likes of Microsoft and Google in the cloud race. But this is coming at a cost. So capital expenditure hits 12 billion in the quarter. That was more than 8 billion expected for the full year. They reckon they're going to spend $50 billion there. A few months ago they said 15. And so it's the spend, but it's not the demand. If you look at the contracted revenue jumped five-fold to $523 billion. So there was a tick in the box, but it's coming at a cost. They've got negative free cash of $10 billion. They got over 100 billion in debt, so that's sort of what investors are a bit worried about. There were some positives, earning spared expectations, their cloud revenues, they are larger than their traditional software business. They're trying to reassure investors. But yeah, I suppose investors cast their vote, massive AI demand, but there's mass of spending on the other side and questions about whether it pays off. And of course, some aren't worried.
Of course, we've had Disney investing a billion dollars in open AI, so you’re soon going to be able to make videos with your choice of 200 Disney characters, including Star Wars and of course, Mickey Mouse.
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See what you're going for first. Fonterra AGM yesterday sounded interesting.
Yeah, that was pretty upbeat. So look, dairy farmers have had a solid year. Obviously we've had, you know, some weak dairy auctions this year, but milk payouts have been very strong. Earnings have been better than expected for the Co op. Demand’s not the issue. There's obviously lots of supply coming out of South America, coming out of of New Zealand and the big seven. But you look, it's been a good year.
Fonterra’s message was we're stable, we're profitable, we're setting up for the next decade. The divestment programme was talked about as well. Of course they're selling that off and farmers are going to get a a pretty nice payout next year. And that should have some trickle-down effects for the broader economy. They stressed it wasn't about shrinking, it was about simplifying and doing what they do best. They're cautiously optimistic for the year ahead.
We know farmers are facing some headwinds in terms of fertiliser and labour costs and compliance, but there's a strong payout behind them and you know, the future looks pretty good and certainly has been a good year for the Co op shares – up around 40% in 2025.
Right. Give us the numbers.
So you've got a mixed bag. So you look at the Dow, it's up one percent, 48547. But on the other side, the NASDAQ, the Tech ladden index, is down 1.1%. S&P down .1%. FTSE 100 in the UK, that's up half percent, 97O3. Nikkei in Japan, down .9%. ASX 200, up .2% in Australia 8592.We're up .2% as well in NZX 50, 13395. Gold up 44 dollars 4272 an ounce. Oil down a $1.21, 57.25 a barrel. Just in the currency markets, the US dollar versus the Kiwi, 58.2, that's up a touch. Also up against the Aussie dollar, 87.24.
British pound we're 43.3, that was down .3% and we're down half percent against the yen, we're 90.3. So yeah, bit of a mixed bag, but yeah, good day for the Dow.
Good stuff, Greg. Thanks very much. Enjoy your day. Greg Smith from Generate Wealth and KiwiSaver Specialists.