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Chart of the Day: That Lagnificient7 and the Nasty9

We’ve long discussed the lagging Mag7 on the podcast on theme of hyper-scalers (four of the seven) emptying their coffers into the hands of the chip- and other hardware makers in the ongoing epic data center buildout. But with Apple’s and even Nvidia’s recent stumbles added to the mix, the underperformance relative to the “broader” Nasdaq 100 (ugh, performance there chiefly chip-driven) has been stark in recent weeks, with a massive recent acceleration as seen in the chart below (shown as ratio of Mag7 ETF MAGS to Nasdaq 100 ETF QQQ). We have also created an admittedly cherry-picked basket of the “Nasty9” - five of the worst suffering large Software-as-a-Service makers (Adobe, ServiceNow, Salesforce, Workday and Atlassian) and four of the also-suffering and large, listed consulting services companies globally (Accenture, Cognizant Technology Solutions, Capgemini and Infosys). An evenly weighted index of the Nasty9 is indexed in the chart below to 100 as of the last trading day of 2023, more than a full year after the November 2022 introduction of ChatGPT. For maximum horror, we plot the Nasty9 to Philadelphia SOX index ratio as well. And we wonder why private equity companies are in trouble for their investments in software? Yikes.

From here, it will be a fascinating moment for the market if, or once, the hyperscalers start to reveal a flattening out, or even drop, in future cap-ex commitments on data center infrastructure. Sure, at that moment we should expect a Mag7 relative performance jump, whether relative to the broader index, but especially relative to chip stocks as the latter could suffer terrifying mark-downs. But could Mag7 stocks fall as well as the market fears that the huge spending commitments will never yield the hoped for profit margins, certainly nothing resembling legacy monopoly-driven margins? And what would be the fate for the Nasty9’s of the equity universe? Would they get a bump as the market sees a delayed “great software extinction event”? Or, do they keep heading lower still in an ongoing funeral march because AI continues to realize its potential and indeed shows steady or even accelerating progress in replacing whole categories of labor and software?

Questions and comments, please!

The latest

The FOMC takeaway was quick and sharp as the elimination of the “easing bias” (and all bias) in the new and stripped-down monetary policy statement by itself was hawkish. The statement itself observed that the economy is doing well, despite the uncertainties from the “Middle East”. The accompanying SEP economic projections of much higher core and headline inflation and a +0.4% bump in the median Fed rate forecast for this year relative to the March forecast, and +0.6% bump for next year also read as hawkish. Of course, with new Fed Chair Warsh setting in motion a task force to overhaul the Fed’s communication strategy and with his specific distaste for forward guidance of the Fed’s intentions, we may have seen our last, or  penultimate, dot plot and staff economic projections. And good riddance!

Warsh’s observations on the trouble with forward guidance were the best part of the press conference: “I think financial markets perform best when they react to incoming data. I think the financial markets work less efficiently when they ask a question, how will the Federal Reserve react to that incoming information..... Financial market prices are probably the most important source of information to guide central bankers. But when all the financial markets are doing is reflecting back what we’ve said, we’re taking the most important source of information and we’re being blind to it.” Amen!

All in all, Warsh is a charismatic speaker and looks like a strong leader at the Fed – making a forceful comment on wanting to fight inflation without providing any guidance for what that means and setting in motion no fewer than five task forces on everything from the Fed’s communication strategy (fully expected) to its balance sheet policy, productivity and the labor market, inflation measures (highly needed!) and other economic data. It will be interesting to see how much he can corral the political energy and the outspokenness of some Fed members, particularly on the board, but also at the margin with characters like the Minneapolis Fed’s Kashkari. As well, Warsh’s ability to maneuver in policy terms will be constrained by the heavy presence of skyrocketing debt servicing costs for the treasury market and the risk that Bessent reaches out a heavy hand to force the Fed into supportive mode on that front.

For now, the US dollar is rallying as US 2-year treasuries are hitting new cycle highs on rising expectations for Fed rate hikes. A September FOMC hike is seen as nearly a sure thing, with about two hikes priced in now by March of next year. I’m not nearly as convinced that these are coming as the market. Warsh noted the risks of uneven policy transmission (pulling out housing as something where conditions look tight, for example). And the incredible AI cap-ex effect may be cresting in the months ahead. Interesting to note that 30-year treasury yields are now lower than they were before the FOMC. Is this due to the unwind of yield steepening bets, Warsh credibility meaning that this Fed’s hawkishness will help beat inflation and slow growth? Not sure, but that long yield effect may be the driver of the JPY outperforming the euro and other currencies here as the USD has risen. (Some might say the threat of MoF intervention is a more important factor – we’ll need some more evidence, for now, let’s just point out that the JPY cross correction is worth tracking).

Chart focus: EURUSD After its recent reversal negated the prior breakdown, EURUSD is at it again to the downside, breaking down through the recent 1.1500 low in the wake of the FOMC meeting as the market adjusts its expectations for Fed tightening higher for this year. The next focus is the 1.1411 range low from back in March when the market was reeling from the Iran war situation. Much bigger picture, the more structural area of interest is down in the 1.1200-1.1250 area that capped EURUSD in 2023 and 2024. Technically, bears are in charge here unless we see a sharp reversal of this post-FOMC move.

Far less drama elsewhere in central bank decisions Wednesday and Thursday. Sweden’s Riksbank shifted ever so slightly to the hawkish side by flagging the conditions were rising in favour of a hike, but the core CPI forecast was lowered for this year to 1.0% from 1.2% previously and the Q3 rate forecast was at only 1.76% versus the current policy rate of 1.75%. The Riksbank is in no hurry to hike and the market was looking for a sharper hawkish shift. USDSEK flows may be a driver here as big levels challenged. With short rates jumping on the Fed meeting and Sweden featuring one of the standout lower policy rates

Sterling was pummeled versus the US dollar post-FOMC and traded lower against the euro today. The Bank of England is just out as of this writing and is clearly in “optionality” mode, saying that the inflationary effects from the Iran War are still “in the pipeline” and that the bank still “stands ready” to act on inflation. The UK 2-year Gilt yield rose seven basis points (from near multi-month lows) today ahead of the BoE Meeting to absorb some of the FOMC-inspired jump in US treasury yields, but steadied and fell slightly lower in immediate reaction to the BoE statement. GBPUSD range support comes in near 1.3160, below which the huge 1.3000 level (the low since early 2025) is a critical focus.

Switzerland’s SNB raised its inflation forecast slightly, but also focused more on the risk of franc strength and talked up intervention. With the world’s lowest policy rate on a day when the focus is on a big jump higher in the Fed policy rate, not surprising to see the stand-out weakness in the franc, which fell against the Euro (note EURCHF near that key 200-day moving average) and was pushed to new lows since early April versus the US dollar, with USDCHF in fact hitting a new high for 2026 as of this writing above 0.8040.

Norges Bank’s hawkish guidance couldn’t buy NOK any relief today as the focus is perhaps on the further drop in the oil price rather than the central bank’s policy rate as local banks raise their peak policy forecast to 4.75% (currently 4.25%). Pretty remarkable to see 2-year NOK swaps pushing back higher just south of 5.00% now. That’s a solid chunk of carry for any holdout CHFNOK carry traders out there. And EURNOK fell a very long way indeed from 12.00 in mid-December to 10.70 in May. But note that the current price of 11.10 is pulling the exchange back into the lower part of the early 2023 to early 2026 range. More important resistance perhaps at 11.25.

FX Board of G10 and CNH trend evolution and strength. Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.

With China holding the USDCNH fairly steady despite the big surge in USD strength, the CNH overall strength has intensified further. But a chunky break higher in the US dollar here, particularly against the weak Scandies and the very weak CAD (see more on USDCAD below). And oh, what to do with JPY firmness here – eyes on long yield dynamics or on the threat of Japan’s Ministry of Finance intervening?

Table: NEW FX Board Trend Scoreboard for individual pairs.

While EURJPY trades at quite elevated levels, we’ve been in a high range for a long time now and it just took a little nudge to send the focus lower, but a trend takes more than a day or two to develop, so keeping an eye out here and on CHFJPY (more negative trending signs there, see lower table) and GBPJPY. Note on USDCAD that the pair is facing some very big resistance at the 1.4140 level, one that it nearly touched today and the highest level since early 2025.