MARKET UPDATE
456 feet. That is the drop distance of Kingda Ka, the world's tallest roller coaster, located at Six Flags in New Jersey. Well, until it closed in November of 2024 to be replaced by an even taller roller coaster in 2026.
That 456-foot drop matched the roller coaster that investors and markets alike experienced last week between Chinese AI models, tech earnings reports, tariff concerns, and more executive orders coming from the Trump Administration, as shown in this chart.
Executive orders issued in the first 100 days in office
Equity market "MVP" Nvidia closed out the week down approximately 12%, while the overall S&P 1500 semiconductor sub-industry was down approximately 10% through the close of business on Thursday.
The negative pressure came from the launch of a competitor artificial intelligence model from China known as DeepSeek. This "threat" to U.S.-based AI companies offers similar performance to U.S. models but at a fraction of the cost and power consumption. The news and speculation as to the legitimacy of the claims caused investors to recalibrate their long-term profitability and growth assumptions related to not only AI chip companies like Nvidia, but also to the broader AI supply chain relating to data centers and power needs.
Beyond the technology-related roller coaster, the Federal Reserve "paused" in its rate cutting trajectory last week to leave interest rates at their current levels, which was largely expected. Commentary from Jerome Powell following the pause indicated the Federal Reserve was in no "hurry" to lower interest rates further if conditions don't warrant further easing. Powell did note the committee remains vigilant of inflationary conditions moving in either direction, given a stabilizing labor market along with potential tariffs.
Speaking of tariffs, investors will eagerly watch the outcome of President Trump's February 1st deadline, when he indicated a 25% increase in tariffs on both Canada and Mexico. Given that Mexico and Canada remain the largest buyers of U.S. exports, a potential trade war with the two countries, should they retaliate to the imposed tariffs, may adversely impact U.S. economic growth in the medium term.
And if all of that wasn't enough, this week brings the latest check-in on the state of the U.S. labor market, including job openings, layoffs, non-farm payrolls, and average hourly earnings. Interestingly, a subtle wording change in the FOMC release last week indicated the Federal Reserve sees the labor markets as stabilized, which is an upgrade from recent commentary indicating a softening labor market. As a result, the trend in labor markets will be closely watched for potential impact on future policy.
WHAT HAPPENED
DeepSeek - Release of the Chinese AI model, DeepSeek, causes significant sell-off in U.S.-based artificial intelligence companies, given its lower cost and power usage.
U.S. Interest Rates - Federal Reserve pauses its policy easing with no change to interest rates.
Bank of Canada - Bank of Canada reduced interest rates by 25 basis points and removed forward guidance on policy due to threat of tariffs from the U.S.
Source: Bloomberg
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