Good morning investors,
The Fed meeting kicks off today with Trump's H200 China chip deal stealing headlines. Nvidia can now sell advanced chips to approved Chinese customers with the US government taking a 25% cut. Paramount crashed Netflix's Warner Bros party with a hostile $108.4 billion all cash bid, turning Hollywood M&A into must-watch drama.
Markets expect a hawkish 25 basis point cut tomorrow, but the real question is whether Powell signals one and wait or keeps the door open for 2026 easing as the long end of the yield curve climbs on inflation fears.
Opening Bell: Chip Diplomacy
Dow ($DIA ( ▲ 1.36% )) futures up 26 points with S&P ($SPY ( ▲ 0.23% )) futures gaining 0.1% while Nasdaq ($QQQ ( ▼ 0.32% )) futures hover flat. Nvidia ($NVDA ( ▼ 1.55% )) edges higher on Trump's H200 approval allowing sales to "approved customers" in China with 25% going to U.S. Treasury, up from the 15% initially proposed in August. Home Depot ($HD ( ▲ 1.8% )) falls over 1% premarket on disappointing 2026 guidance of 0-4% earnings growth versus 5.2% expected.
The chip deal marks strategic brilliance: maintaining China's dependence on US technology while generating government revenue, if the Chinese play ball. Jensen Huang's argument that selling advanced chips prevents China from accelerating domestic alternatives appears to have won over Trump, though Beijing's willingness to actually buy remains uncertain.
Paramount's Hostile Hollywood Play
Paramount Skydance's $30 per share all cash offer for Warner Bros tops Netflix's $27.75 cash and stock deal, creating Hollywood's most dramatic bidding war. The $108.4 billion hostile bid came after Warner Bros allegedly ignored Paramount's overtures, forcing the aggressive move.
Trump's stated "problems" with Netflix's market concentration adds regulatory uncertainty. Paramount's smaller size and all cash structure provide advantages financially and politically. Markets clearly prefer both companies finding partners with Paramount up 9% Monday while Netflix fell 3.4% as shareholders root for any deal completion.
China's Chip Dilemma
The H200 approval creates fascinating game theory. China desperately needs advanced chips with Alibaba CEO Eddie Wu citing supply shortages across the semiconductor chain. Yet Beijing's self-sufficiency drive and domestic champions like Huawei make dependence on US technology politically unpalatable.
Huawei's Ascend chips remain behind Nvidia in performance and efficiency despite massive investment. Chinese tech giants have survived on stockpiled pre-ban Nvidia chips combined with inferior domestic alternatives. The H200 offers significant performance upgrades but accepting means admitting technological dependence.
Calendar - JOLTS Double Feature
Today's release of both September and October JOLTS data provides the Fed's last labor market reading before tomorrow's decision. Though stale, any surprises could shift the narrative heading into Powell's press conference. Small business optimism data adds context on Main Street health.
GameStop earnings after close offer entertainment value if nothing else. The meme stock's ability to generate surprises despite fundamental challenges remains impressive. AutoZone, Campbell's, and Cracker Barrel provide consumer spending intelligence across different demographics.
Fed's Hawkish Cut Consensus
Markets price 89% odds of 25 basis points tomorrow, but rumors of 50 basis points circulated Monday. The consensus expects a hawkish cut, easing now but signaling pause ahead. This threading the needle approach attempts satisfying both camps without committing either direction.
The long end's behavior matters more than the cut itself. Ten-year yields climbing despite cut certainty suggests bond markets fear 2026 inflation resurgence under a Hassett Fed. The curve's message: near-term easing acceptable, long-term accommodation and Presidential influence dangerous.
Home Depot's Reality Check
Guidance of 0-4% earnings growth for 2026 versus 5.2% expected confirms housing's continued struggles. The home improvement giant seeing minimal growth despite rate cuts coming suggests deeper structural issues in housing turnover and consumer spending patterns.
This validates the K-shaped recovery persisting. Those with homes aren't moving or renovating while those without can't afford entry. Rate cuts alone won't fix frozen housing markets requiring both price and psychology shifts.
Final Thought
The market approaches tomorrow's Fed decision from a position of strength, with the S&P near 6,900, volatility contained, and earnings solid. Yet beneath this calm surface, crosscurrents intensify: bond yields rising despite cut certainty, China chip sales uncertain despite approval, and Hollywood M&A creating unprecedented consolidation.
We're in that peculiar late-cycle moment where good news gets questioned and bad news gets celebrated. The Fed cutting into economic strength seems bullish until you consider why they feel compelled to ease with stocks at records. The answer lies in preemptive insurance against 2026 uncertainties rather than current weakness.
My expectation: Powell delivers the hawkish cut markets expect, emphasizing data dependence and flexibility. The dot plot likely shows fewer 2026 cuts than markets hope, causing initial disappointment. But any weakness becomes buying opportunity as performance chasing dynamics overwhelm Fed parsing.
The real tell comes from how markets digest the China chip deal. If Nvidia rallies sustainably on reopened revenue potential, risk-on continues. If skepticism about actual Chinese purchases dominates, defensive positioning persists. Watch semiconductor reactions closely.
December's rally thesis remains intact but requires navigating tomorrow's Fed choreography carefully. Use any hawkish cut disappointment to position for year-end strength. The chase dynamics from 78% of managers trailing haven't even started.
As always, feel free to reach out with questions about positioning around the Fed.
Best regards,
Dan Sheehan
This newsletter is for informational purposes only and should not be considered as investment advice. Please consult with your financial advisor about your specific situation.