FX: The real "manipulator" of the Federal Reserve's interest rate hike expectations is not Powell, but it!

This week, Nvidia's earnings report and Federal Reserve Chairperson Jerome Powell's remarks at the Jackson Hole annual meeting are undoubtedly the two biggest market drivers. If you have to compare, who is the real manipulator?

Ben Emons, senior portfolio manager and head of fixed income at NewEdge Wealth, believes the answer may come as a surprise, and it may not be Powell but Nvidia that drives the Fed's rate hike expectations. He pointed out that the artificial intelligence leader has central bank-like influence.

Emmons said Nvidia, which will report results on Wednesday, is a bellwether for artificial intelligence capital spending, whileArtificial intelligence capital spending could boost productivity across the U.S. economyHe pointed out that in the bond market, optimism about the prospects for artificial intelligence is translating into higher real yields, reflecting growth in inflation-adjusted gross domestic product (GDP) and productivity. From a broader market perspective, higher real U.S. yields are a key reason why 10- and 30-year Treasury yields climbed to multi-year highs on Monday.

Normally, bond yields tend to rise due to a range of factors, such as the likelihood of higher inflation in the future and investors' claims for risk compensation, but this time it seems a little different. Real yields, as measured by inflation-protected Treasury yields (TIPS), reflect market expectations of how the US economy will perform regardless of inflation.

Joseph Kalish, chief global macro strategist at Ned Davis Research, concluded that the recent rise in long-term Treasury yields has largely come down to one thing, namelyChanges in U.S. economic growth expectations have led to a rise in real yields.

"The bigger macro story behind Nvidia as an artificial intelligence leader is the role it plays in the economy, which is proving to be more powerful than anyone imagined," Mr. Emmons said on Tuesday. "People associate artificial intelligence with productivityIncreased productivity drives economic growth, which to some extent affects interest rate expectations today "。

The senior portfolio manager wrote in a note this week that "the possibility of a rate hike is gradually increasing" as expectations grow for Nvidia's upcoming earnings and Powell's speech. He predicted that,Every dollar increase in Nvidia's earnings per share forecast increases the likelihood that the Federal Reserve will raise interest rates in November. Nvidia is having a Fed-like influence。

The chart provided by Emmons shows that the median analyst estimate for Nvidia's second-quarter earnings per share has been rising, and the market has also hinted that the possibility of the Federal Reserve raising interest rates in November is also increasing.

In addition, Emmons said that due to Nvidia's broad impact on the economy, the yield on a corporate bond issued by the company in 2020 and due in April 2040 has been rising relative to the 10-year TIPS yield.

As Jeremy Siegel, a professor of finance at the Wharton School of the University of Pennsylvania, explained in another interview with MarketWatch, real interest rates track real growth.Higher productivity and strong economic growth "mean the Fed will not be able to cut rates as sharply as it has in the past".

At the Jackson Hole annual meeting on Friday, analysts expect Powell to discuss the so-called real neutral interest rate (the long-term equilibrium or natural interest rate, which refers to the short-term interest rate at which monetary policy neither contracts nor expands at full employment and stable inflation).This justifies keeping US interest rates high for a long time.

Kalish wrote, "Markets have consistently underestimated the risk of further rate hikes and overestimated the potential pace of rate cutsPowell would be "pleased with the progress of commodity inflation and would like a better balance in the labor market, but concerned about faster-than-trend growth".