How Hedge Funds See the US Economy

 

Overseas macroeconomic data has entered a brief vacuum period. In the first half of last week, there were no significant data releases, and the market performance was relatively flat. As we moved into the latter half, with the release of NVIDIA's (NVDA US) earnings and data such as PMI and inflation expectations, signs of a resurgence emerged. Concurrently, the presidential candidate has nominated macro hedge fund heavyweight Scott Bessent for the position of US Treasury Secretary. Bessent, who once worked for Soros and achieved great success in the hedge fund industry, commands more market attention for his views.

Over the past few days, analyses of Bessent have been abundant. Most notably, he recently proposed the eye-catching "333 Plan": to reduce the budget deficit to 3% of GDP by 2028, achieve 3% GDP growth through deregulation, and increase daily energy production by 3 million barrels or an equivalent amount. He believes that implementing this plan will create conditions for the Federal Reserve to initiate an "appropriate easing cycle."

As a macro hedge fund magnate, Bessent combines the mindset of a trader with macro thinking. For instance, he tends to "think contrarian," avoiding alignment with the majority, and believes that if he does not agree with the popular market trading direction, it's better not to participate at all. He also places bets on his own and believes that the greatest returns come from working for oneself. From a macro perspective, he views the US fiscal deficit as excessively high and advocates for significant government spending cuts. He also supports a strong dollar and digital currencies; some have noted that Bessent considers the yen to be overly weak and predicts a 40% appreciation.

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These macro views, when considered together, actually point to some interesting directions, namely that the US can gradually reduce the fiscal deficit by increasing government and economic efficiency, thereby supporting the strong position of the dollar. These are valid from a macroeconomic standpoint, but whether a strong dollar also implies a "strong yen" depends, to some extent, on the performance of the Japanese economy and the long-term support from the US towards Japan.

From this perspective, does it mean that the euro will inevitably become a victim? Regardless, considering the issue from a macro hedge perspective essentially involves finding the investment portfolio with the highest risk-adjusted returns under established trends—and this combination often initially appears "unrealistic." One can imagine that after Bessent takes office, the influence of Federal Reserve Chairman Powell may be diminished, especially considering Bessent's consistent criticism of the Federal Reserve, such as deeming its September rate cut as premature and excessive.

Last week, in terms of data, the November US PMI data continued to show a divergent trend. The manufacturing PMI recorded 48.8, continuing a moderate contraction trend, while the services PMI broke through the consecutive months of 55 levels, recording 57, the highest since May 2022. In terms of PMI sub-items, the market is undoubtedly more focused on labor and price-related data. The results show that the manufacturing and services job markets are beginning to converge, with the manufacturing employment sub-index rebounding above the boom-or-bust line (50), which may reflect the return of some striking workers. However, the services employment sub-index further declined to 48.7, falling into contraction. On the price front, overall, it is favorable for inflation. Although input costs remain high, S&P Global's composite selling price index fell to its lowest point in over four years this month.

After a brief adjustment, the upward momentum was regained. First, the US dollar index welcomed a three-day rise in the latter half of last week, closing at 107.5, the highest level since the end of 2022. The recent strengthening of the US dollar index is closely related to the market's adjustment of expectations for a rate cut by the Federal Reserve in December. CME's FedWatch data shows that the market expects a pause in rate cuts with a probability of over 47%, compared to 17% last week. The marginal change in rate cut expectations is a direct reflection of the market's assessment of the future policy effects of the US government. As officials' nominations are confirmed and recent Federal Reserve officials express a cautious attitude towards the future path of monetary policy easing, concerns about "reinflation" are slowly "growing."

Of course, the continued sharp decline of the euro is also a key factor in driving the strength of the US dollar, which is not unrelated to the further deterioration of the European fundamentals. The Eurozone's November PMI data, released slightly earlier than in the US, was below market expectations across the board, further下探 below the boom-or-bust line. The Eurozone's November manufacturing PMI and services PMI recorded 45.2 and 49.2, respectively, lower than the market's expectations of 46.0 and 51.6.

The continued deterioration of economic data is dragging down the euro, and since the US election, the euro has累计 fallen nearly 5%. This year, the European Central Bank has already lowered the policy rate by 75 basis points to 3.25%. After the weak PMI data was announced, the market has bet that the possibility of the ECB cutting rates by 50 basis points in December has reached 50%, and it is expected that there will be an additional 150 basis points of rate cuts next year.

Another focus of the market last week was the third-quarter earnings report of chip giant NVIDIA. NVIDIA's performance once again exceeded market expectations, with 3QFY25 revenue of $35.08 billion (up 94% year-on-year, up 17% quarter-on-quarter), while the market consensus was $33.25 billion.

Although revenue continues to set a new record for a single quarter, with all business revenues above analyst expectations, it is puzzling that the company's stock price fluctuated after the results were announced. If we consider the trend of NVIDIA's stock price before the announcement, we are more inclined to believe that this is the result of investors having already bet in advance that NVIDIA's performance would exceed expectations again, and some short-term investors taking profits and leaving after the announcement.

Deep down, NVIDIA's stock performance reflects the outlook of the US economy. NVIDIA has the highest weight in the US stock market and guides the US stock market index. Including NVIDIA, seven leading technology companies have driven the market up by 24% this year. Deep down, AI technology is widely applied in industries such as production, services, autonomous driving, healthcare, education, and corporate operations, improving the production efficiency of various departments in the economy and promoting economic growth.

In the field of AI chips, NVIDIA's chips account for the vast majority of the market, and the chips it produces have even become the "hard currency" of technological development. To some extent, investing in NVIDIA is equivalent to investing in the prospects of the US economy and the profit expectations of the entire US stock market. Therefore, after the earnings report, the US stock market regained its upward momentum, with the Dow Jones index rising for three consecutive days to set a historical high, and the S&P 500 also rising for five consecutive days. Looking at the whole week, the S&P 500, Nasdaq, and Dow Jones respectively recorded gains of about 1.7%, 1.7%, and 2.0%.