Generate’s Investment Specialist Greg Smith was on Newstalk ZB with Mike Hosking this morning, discussing the need for the RBNZ to deliver a “Goldilocks” rate cut at its final meeting of the year. He also spoke about how stronger U.S. data has significantly increased the likelihood of a Federal Reserve rate cut in December. Also up for discussion was Alphabet, with Google’s parent closing in on Nvidia as the world’s most valuable company, as it challenges the AI darling’s dominance.
Listen here or read the transcript below:
From Generate, Greg Smith, good morning to you.
Morning to you Mike.
RB - call it. What have you got?
Hey, it's 29 days till Christmas so it's time for them to spread some much needed joy heading to the festive season. But I think quarter point cut is what we need. So obviously we've seen it come down the OCR from 5 ½% last year, 2 ½% currently. We are seeing elements of positivity. You talked about those Seek job ads yesterday, but we're yet to see those full transmission effects weave their way through. Now in the past, I've called for jumbo rate cuts, but I think we'll be a bit more pragmatic this time around. So look, we're still in a tough spot, but there are dare I say it some green shoots coming through. And I think if they go 50, that might actually induce a bit of panic in sort of the sense that, hey, maybe they're done with rate cuts.
So let's go 25. Let's keep the powder dry till they meet again later in February and see how the economy goes in the coming months. And, and if not, if there's no improvement, then they can go again and they should be prepared to do this.
So we've got around 40% of mortgage holders coming off their rates in the next four to five months. So that should help, you know, businesses lower borrowing costs. I think it'd be important to look at what their forecasts are doing and how they're shaping up. They’re definitely going to downgrade economic growth given the deterioration in recent months, but also maybe inflation.
So obviously we know the currency has been weak, but we've seen inflationary heat coming out of some categories thankfully, you know, particularly food. Business inflation expectations that have softened. And it will also be important to see where they see the OCR bottoming out. Financial markets see this as being 2.1% next year. So we need to stick to that script. So ultimately I think we need a Goldilocks cut, not too much, not too little, and a nice touch of dovishness about the outlook.
Christian will be listening now. I gave the consumer thing on America. What about producer prices, retail sales where it's a bit mixed isn’t it?
Yeah, it's a bit mixed. So looks like consumers have paused a little bit, after some more data after the shutdown ended.
So US retail sales up just .2% September, softer than the .3% forecast. Excluding autos, it was up .3%. That was in line. Sales at eating and drinking establishments, I suppose that stood out. That's up 6.7% from a year ago. Solid .7% on the month. So you can say in that regard, consumers are in OK spirits. But yeah, generally pretty soft. Bit of a pause annually, 4.3% from a year ago. It's not inflation adjusted, so it is above the 3% CPI. So that's good news. Producer prices, just looking at inflation that was up .3% mostly driven by rising energy costs.
So Mike, so you strip out food and energy, it rose less than forecast from August and up 2.6 from a year ago. That's actually the smallest gain since July last year. So that's good. I think overall, it probably keeps the idea in line that we're actually going to get a rate cut from the Fed next month. Obviously those expectations have been moving around a little bit. There's a little bit enough softness in the consumer. The PCE report has played ball as well. So that's pretty much it in terms of the major reports we're going to get before they meet on December 10.
Markets are pricing in an 82% probability of a rate cut now.
Wow I'm looking at AI. Amazon going to spend 50 billion on AI infrastructure. This chip AI thing is unreal isn't it? Meta’s in as well.
Absolutely. So move over NVIDIA, we've got a new top dog almost in town in terms of AI. So yeah, Meta is going to spend a lot. So on Google chips, their data centres, these tensor processing units. So these are an alternative to what and NVIDIA has in terms of its advanced chips and just really a challenge to their domination. Meta also may be renting chips from Google's cloud division next year. So we are just seeing investors sort of reassess, I suppose that the landscape.
We also had rave reviews for Alphabet’s new Gemini AI model and that's seen the shares push higher today, while NVIDIA is down 4%. So you look at Alphabet they’re nearly 3.9 trillion of market value, about 300 billion away from where NVIDIA sits. So NVIDIA, those shares are still doing well. Year to date date up 30%, Alphabet up 67%, they have added a trillion since mid October.
And yeah, all the noise around AI being bad for Google search Mike it's actually been the opposite. They're using AI to get better outcomes. Also probably helps sentiment that Warren Buffett made Alphabet his largest purchase last quarter. So yeah, perhaps step aside NVIDIA soon, Mike.
Have you got some numbers for me?
I certainly have, and a positive as far as S&P 500 goes, they're up .3 percent, 6726. Dow up .9 percent, 46869, so that's welcome. NASDAQ fairly flat. FTSE 100 up .8 percent, 9609. That's ahead of the UK budget, of course, Nikkei up .1 percent, 48659. ASX200 That was up .1 percent 8537. We were down .1%. NZX 50 13480.
Gold up 11 dollars, 4147 US an ounce. Oil down $1.20, 57.61 and the currencies flat against the US dollar was the Kiwi 56.1. Against the Aussie dollar we’re up .1%. 86.9. British pound 42.6, that's down half a percent. Also down against Japanese yen 87.7.
So yeah, hey, drum roll for the RBNZ Mike, 25 or 50. Let's see.
Catch up soon, appreciate it. Greg Smith, who is out of Generate Wealth and KiwiSaver specialists.