Power Lunch - Nasdaq falls 4% on big tech drop and tariff fears 4/16/25

Episode Date: April 16, 2025

Stocks are falling sharply, as investors heed a stark warning from Nvidia that pressured global tech and concerns from Federal Reserve Chair Jerome Powell about the economic impact of tariffs. We’ll tell you all you need to know. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

You're listening to Power Launch in progress. That was Federal Reserve Chairman, Jerome Powell, speaking at the Economic Club of Chicago. A few big headlines that caught our collective ears. Where that Trump's policies are still so new, it is really hard to gauge the real impact. But the Fed does believe the tariffs are likely to generate at least a temporary rise in inflation, meaning prices may go up even from here. Powell also added that the federal government, though debt is on an unsustainable. path. He likes to go to the gym. Welcome to Power Lunch, everybody. I am Brian.

Sullivan, Kelly, of course, on Squawk Box all weeks. She'll be back on Monday. One thing that is not going up, along with apparently prices, are stocks. The markets are down and down big across the board. The NASDAQ composite is down 3.5%. The NASDAQ 100 down even more. Small caps down about 1.5%. Invidia is a big drag on not only big tech, but the

entire market, all because of a multi-billion-dollar accounting shock. I'll get more on that in just a moment. But right now, let us get some reaction to everything that we just heard and some prepared remarks. And then, of course, that interview session on stage, Steve Leesman, senior economics correspondent. And Aditya Bave is head of U.S. economics at Bank of America Securities. They're joining us as well.

I believe Steve is there. Steve, the comments about debt caught my ear. the comments about tariffs and inflation caught my ear, but you're the expert. What caught yours? I don't disagree with any of the things that caught your ear, of course, Brian. But I think the operative thing that the market took away from this is Powell is in no hurry to cut interest rates because of the concern of what you read earlier, which is the potential persistence of inflation on the backside of a one-time increase from tariffs. And I think that was really the key, He really repeated remarks he'd made back in April, which were pretty strong back then.

And now after all of this tumult and uncertainty, he remains where he was. He did not second some comments that were made by a Fed governor that looked at the possibility of easing in either scenario of weak economic growth or strong economic growth or temporary or persistent inflation. I don't know if we have a piece of sound that I wanted to use that really did catch my ear. Just tell me folks in the back if you have it. If not, I can tell you what he said. And what it was was that he's concerned that, hang on, let me just find this one piece of sound here, Brian,

or he says he's worried about supply chains are likely to be disrupted significantly. And you would worry that that process will take some years. And if the inflationary process might be extended, he was comparing that to the pandemic. And so when you start to make those comparisons, you start to hear a Fed chair who's maybe a little more worried about the persistence of inflation and less reliant upon the theory that these are one-time pastors.

Steve, I'll go back to you because these are critical elements for the Fed. Now, I've been pretty vocal. I don't know what the Fed can do here. Maybe you do. It could be a trade war. So what power they have over this of the economy, I'm not so sure. Maybe you have more insight into that. But let's be clear, if Jerome Powell is on stage talking to,

about inflation, not disinflation or deflation, inflation. That is, I think, Fed speak pretty loudly for we are not cutting interest rates anytime soon. I think that's the correct analysis. Now, it doesn't mean they won't when they can be sure. Now, there's two scenarios under which they might. One is that you have an outsized or very obvious downturn in the unemployment rate that really it makes it clear that we're going to have a recession, the Fed might step in in that case, or if we see only modest and very limited and contained impacts from the tariffs. But the trouble is, Brian, I keep running scenarios through my head. And I'm just going to look here because I just ran the numbers on the Fed probabilities. And what I came up with is the market thinks the Fed's going to cut in

June. But it's a 69% probability or 70% probability. But you think that you think that's a Think about where we are in June. We have this 90-day period of negotiations that takes us through July. And let's not forget, Brian. If all we were talking about were a 10% across-the-board increase in tariffs, it would be the lead story, and we'd be talking about that all over the place. But now we've also got all these other individual sector tariffs. There is a major change going on.

I think the Fed Chair said it was bigger than Smoot-Hawley, which I actually didn't know. but I'll take his word on that. And so the effects are going to be bigger. And so we're trying to figure this out. I keep thinking maybe, Brian, of Muhammad Ali doing roper dope, which is really the way that the Fed is probably doing monetary policy right now, which is just covering itself up, taking the punches, and then at some point it lowers its arms and says,

okay, now I'm ready to fight. Well, everybody thought Ali was losing that for a long time until he came back. But he wasn't. Are tariffs inflationary or disinflationary or deflationary or deflationary ultimately? Do you know? I 100% agree with Steve. It really depends on the size of the uncertainty shock, right? So tariffs are stagflationary, but there's also, it's not just what they said, right?

It's how they said it. And the manner in which trade policy has been released has been, you know, a little bit disruptive for businesses, right? So there's a lot of uncertainty right now, and there is a state of the world where that uncertainty shock actually outweighs the stagnationary impact of tariffs, and in that case, tariffs will be disinflationary. But what we heard from Powell right now was hawkish. There's no doubt about that. Steve talked about the analogies to 2021-22. Here's another one. Powell said, and this for me was the most important part of his prepared remarks, he said that you cannot have an extended period of full employment without price stability.

If you're a Fed nerd like me, you remember that he was saying the same thing to justify the previous hiking cycle, right? Remember, they were hiking through what was in real time a technical recession. But the Fed stayed the course and focused on price stability, and we think they're stuck. We think they're going to do the same thing, at least in the near term, this time around. So, Aditya, and I have been very vocally critical of the Federal Reserve at the ends of COVID or at the middle of COVID, because I thought they kept stimulating. They contributed to inflation by keeping rates too low for too long, and they stimulated, in my opinion, nobody cares.

Except Powell's talking about COVID-related or COVID similar impacts from tariffs, meaning supply chain disruptions. Will the Fed and J. Powell act the same as they did during COVID, if that's the case, i.e. stimulating, stimulating, stimulating. or do you think they change their behavior slash learned from COVID? And some might say mistakes, who knows, and are going to act differently this time? I think it's more the latter.

So if you think about the supply chain disruptions, that was not during the period when the Fed was stimulating. That was when the Fed reacted very aggressively, perhaps a little bit late, maybe a quarter too late, but they reacted very aggressively. They raised rates by 425 basis points in one year. Now, I don't think they're going to do that again, but the case to stay on Horde right now is pretty strong. So, Steve, what do you think, you know Jerome Powell personally? What do you think he's going to do?

Well, I want to make one point off of what Aditya said, which is that notice that the Fed Chair is not talking about rate hikes here. Some of his colleagues on the Federal Market Committee have kind of hinted at that. Powell really wants to stay put. He wants to use what he believes to be. existing modestly restrictive policy in order to address whatever is coming from inflation. And by the way, a little bit of Fed speak in order to do that. Talking tough now perhaps creates the possibility that the Fed won't have to hike later by making clear to markets, to companies, to consumers, that the Fed will not tolerate higher inflation.

But I agree with what he said about the importance of elevating inflation to the importance relative importance to employment the way he did back when he was hiking rate strongly. So I think the outlook here is the Fed just has to wait and watch and take a look at how things pan out. It is interesting that the tariffs have created a very unusual situation for the Federal Reserve. Normally, Brian, we would look for the dollar to appreciate in a sense of a country erecting trade barriers, especially the reserve currency, that would limit the supply of dollars abroad. That's why the dollar would appreciate. But the dollar has actually gone the other way

and it has depreciated relative to most major currencies. That actually creates a secondary, inflationary source. Maybe not a big one, but it's something worth watching that if we were a third world country, Brian, just real quickly, and we were facing this kind of depreciating currency, the central bank might be forced in that instance to be raising interest rates. We're not either, but I'm just saying that's the situation. And I guess Adiach of my confusion, or maybe the question is this, it's like auto insurance rates. Auto insurance rates for the majority of Americans have soared. It's for a lot of reasons. Cars are more expensive, more technology, more wrecks, people are driving like idiots since COVID, whatever you want to say. I don't know what the Federal

Reserve can do about auto insurance rates. And I bring that up because if tariffs are going to be inflationary de facto. What can the Federal Reserve possibly do against companies having to raise prices by a couple of percent because their costs have gone up? I just don't, unless they crash the economy so that people aren't buying anything. Right. So what the Fed can do is

not add more stimulus into the economy. That's the best they can do right now. I don't think they necessarily want to tighten and exacerbate the downser risk to the labor market, I don't think they necessarily want to ease and exacerbate the upside risks to inflation, right? So it's a matter of the analogy we've been using is stagflation is like your two kids running off in opposite directions. And you kind of have to figure out whether you just call them back, whether you chase one and then you get further away from the other. It's a very, very difficult decision. Yeah. So, Steve, I mean, that is the needle, I guess,

that has to be threatened is that if there are supply chain disruptions that are de facto inflationary in the near term, but possibly lead to an economic slowdown in the longer term because people don't want to pay higher prices on what already are higher prices over the last five years because of previous supply chain disruptions, what do Jay Powell and the other voting members of the Federal Reserve ultimately do? And more also, what is the bond market? telling us because the pond market went really strongly one way and then about a week ago did a complete U-turn. Yeah, and now it's actually a little bit weaker right now.

I mean, it's kind of funny when you talked about the, I did you talk about the two kids running the other way. I was like, we'll put a leash on them or put him in a playpen or something like that, which is what the Fed wants to do with both dual mandates, I think. I think what the Fed does is it stands pat here. I was really interested, Brian, in your analogy about motor vehicle insurance, because that's a really good example. Remember what happened. The price of autos went up, and it was vehicle insurance that came later.

And that's the kind of knock-on effect that you've got to be worried about as a central banker. Oh, okay, we can see how much cars went up. Oh, but there's this other thing that comes down and pushes up inflation down the road. I think the best possible situation here is for the president to come out very, very strongly and definitively about what these tariffs are going to be so we can get on with the process of figuring out the future of the economy, the market, and monetary policy. Steve and Adich, I've got some very good news for you and all the viewers and very bad news for me. We're about to begin a massive home improvement project, home construction project. And so I'm going to be living these tariffs real time, firsthand, first person for like the next nine months. So anything I see, I will tell Steve, and then he can tell the world, and it's going to be great.

And I'll probably need an adult beverage or three. Aditya and Steve, thank you very much to appreciate that. All right. Speaking of the bond market, why do we get bond market reaction to some of those comments? And also, Rick Santhali, talk about this U-turn that we just talked about because Bonn, yields crashed and then soared all like the last eight to 10 days. Yeah, there's been a lot of movement, but I'll tell you, there is something to be learned today. And before we get to any charts, don't show the chart check control room.

Remember, the short maturities are most associated with thoughts about the Fed, what investors are thinking about the Fed. And the longer maturities historically are more in tune with things like inflation and the economy and its output and its condition. Having said that, let's look at the S&P in a two-year chart paired together. And what you don't notice is there really wasn't a lot of movement to the downside in the short maturities. But when you pair up the S&P in a 10-year, there was a much better correlation that as stocks moved down, they drag 10-year yields down with them.

So my interpretation of that is rather important, at least, in my mind, mind, and that is that we're concentrating more. Investors were concentrating more on Powell's influences with regard to his speaking about a weaker economy, potentially a weaker labor market, potentially weaker consumer spending versus anything for the Fed riding to the rescue. And to back that up, let's look at these Fed Fund futures. There really wasn't a lot of movement, and any movement there was was really towards the end pretty much when he was done. move back up because there's always hope that if the equity markets may get nasty enough, maybe the Fed would ride to the rescue. And as Steve pointed out, we still see potentially an

ease in June. But all things being equal, the differentiation between short and long maturities when Powell was speaking, I think is very enlightening. It seems to me everything right now is about inflation and the strength of the economy. Okay, fair enough. Very quickly. We got to go. Is there anything the Fed can do? Do they have the power to do anything? Well, my opinion is, if you're asking, will lowering rates help things like auto insurance, of course not. But then again, use that in a variety of situations. Lowering rates doesn't really alter many things that are going to be pushing inflation up or the economy down.

Ultimately, I think that what the Fed is going to try to do is just make sure the markets have enough liquidity. to continue to function. Well said, Rick Santelli, as always, thank you very much. All right, folks, so we got a market alert. The NASDAQ 100 is down 3.5%. It's one of the biggest declines that we have seen this year. InVIDIA shares, they are sinking. They're the worst single performer on the S&P 500 today.

It all has to do with a big accounting hit that they kind of shocked the market with after hours yesterday. Christina Partseneveles up after the break. to tell you what Nvidia did that is spooking the market so much. We're back right after this. All right, welcome back. It is a rough day for arguably the most important stock in the world. That is Nvidia.

Invidia shares down almost 10% right now. The company's surprising the market with a more than $5 billion accounting hit related to trade. It's trying to make sense of all of this. Christina Ports and Nevelas joining us. Now, I understand there's like export controls and fancy words, but the reality is the market did not see this coming. To a certain degree, the restrictions are actually expected we just didn't know was going to be $5.5 billion write-up, but their news actually gets worse, Brian.

And I say that because now the House Select Committee on the Chinese Communist Party has launched its first ever investigation into the chipmaker to determine if it knowingly provided critical AI technology to Chinese firms in violation of export controls. This according to the New York Times. And this development actually broke, Brian, in the past hour. and I can confirm that Nvidia had previously appeared before Congress to answer questions on this matter. So this is additional scrutiny, and that's why you saw the stock drop even further to 10%. InVIDIA was already trading lower after we talked about announcing that $5.5 billion Q1 charge following new U.S. government export restrictions on advanced chips to China, including the H20s. So this means that all the upcoming Nvidia Blackwell products are also unlikely to meet compliance thresholds for Chinese markets.

and V-ViO will have to seek out licenses. Evercore ISI reports conversations with NVIDIA's CFO revealed limited market expectations for these chips outside of China, and H-20 production can't be easily shifted to Blackwell because of different manufacturing lines and processes, which is why you're seeing such a large write-off. While China, though, does contribute about 13% of total fiscal 2025 revenue, it's the lowest level in a decade. It's a Wall Street right now. There are a lot of the sell side are cutting estimates.

Stanley right now indicates these license requirements will reduce data center revenue by eight to nine percent over the next few quarters. So definitely a hit to revenue. Meanwhile, Trump's new export controls really could significantly boost sales for Chinese domestic manufacturers led by Huawei, which has been aggressively developing its own AI processor. So a lot of news from video today, Brian. Yeah, there really is. And it's something that the market clearly is surprised, Christina, because

because NVIDIA stock is down 9.8%. That's also because a week and a half ago, there was a report that Jensen Wong successfully convinced President Trump to not ban these chips. And so now we know that that's not true. And it seems like the administration is not going to back down. So who else will be next? AMD said that they're taking an $800 million charge.

Broadcom could be next given their relationship with bite dance. We could see Marvell in the mix, et cetera. So it's really weighing on the entire sector. It really is. And that sector is arguably one of the most, if not the most important in the market. NVIDIA is at about 500 different ETFs. So that news bringing down semis, which is bringing down the market. So between NVIDIA and the Federal Reserve chairman, you've got plenty of news today,

but investing is not a one-day game. So what does the longer take on protecting and growing your money? It's a scary time. Joining us now is Jim Tierney. He is CIO of U.S. concentrated growth at AB. And Kathy Jones. Chief Fixed Income Strategist at Charles Schwab. And love having you both on, Kathy, because I'm trying to make the point.

Today's a big move. Last week we had big moves. And the week before that, we had even bigger moves. Most people that are watching and your clients are thinking about three, five, 10, 20 years from now. What moves, if any, should they be making right now? Oh, hi, Brian. I, you know, I think the most important principles,

right now are the basic principles for an individual investor, and that is to stay diversified, to understand your own risk tolerance and your risk capacity, and to try to ignore the noise. So in fixed income, you know, we typically will suggest a long-term investor who's looking for fixed income to provide income and capital preservation and diversification from stocks. stick with higher credit quality bonds for the bulk of their portfolio. And probably right now I have about an intermediate term duration, we're at five to seven years somewhere in there. That's a sweet spot.

You can earn a fair amount of interest income without a lot of credit risk, without a lot of volatility and interest rate risk. And I think this is a great environment for that because there's so much up in the air, so much uncertainty, so much volatility. we're just sticking with a real basic kind of up in credit quality, intermediate term duration portfolio. Yeah, and you know, Jim, I kind of made a tongue-in-cheek comment the other day. I'm not sure I'm doing this 29 years when there was a great period of certainty.

We always talk about there's so much uncertainty. Life is uncertain. So is there any certainty in investing right now? There is not. We're going to learn a lot more in the next few weeks in terms of how companies. are dealing with tariffs and what the tariffs are really going to be. There are a bunch of negotiations going on, so we'll get a little bit more certainty. But I think as an equity investor, which equities make the bulk of most people's portfolios, you have to find the opportunities. You have to be

selective. And I do think there are opportunities out there right now. Yeah. And Jim, we go back and we say, okay, is now the time to sell because the markets went up 10% off the lows. We're down 20%. We spike back 10%. people obviously were selling into that gain up. It's not my opinion. The market is down. But again, if I'm investing for three, five, ten years from now, I want, I think, slightly lower prices. Now, in a market that is still up 90% in five years. We're coming off back to back 20% gains. I want to go up 20% every year. It's just not possible. No, I don't think it's possible, but it is possible to find companies that can grow double digits over the next five years. do that and attach your clients to those kind of companies, I think you do well. Right now, with all

the tariff uncertainty, you don't want to be a major importer or exporter. But if you have manufacturing around the world and you're building local for a local, I think that's a phenomenal opportunity. Companies like Eaton do that. Companies like Amphanol do that. Eaton is in 35 countries around the world. Amphanol is in 40 countries around the world. I think those companies are going to be much better protected, and then companies with pricing power. If the tariffs come to be in effect in some form or another, if you have pricing power, you're going to be more protected than companies that don't. EcoLab announced this morning that they are implementing 5% price increases across the board. If they can achieve those price increases, they're going to be a heck

of a lot better off than a company that's going to have to eat it. And that's what we're looking for. Yeah, the Eatons, the Amphenols of the world. These are interesting names. Kathy, going back, because our top story, obviously, where at the beginning was Jay Powell and Jerome Powell did the sort of the fireside chat, whatever you want to call it, at the Chicago Economic Club. Is there anything that you heard that makes you think that there's a change coming in the direction of the Fed and or interest rates? No. In fact, I think if there was any surprise, it was that he defended their position of sitting on the sidelines and waiting. There might have been some hope out there that he would indicate, yeah, we're getting ready to cut rates because, you know, we're

confident about inflation. But instead, he basically said, no, we're going to wait and see, get some clarity. We're pretty confident. We're in the right place right now. And we'll let you know later. I was surprised he talked about inflation expectations being well anchored. I think there's some evidence that they're not as well anchored today as they were six months ago or a year ago. So I'm a little surprised that he alluded to that. What do you mean by that, Kathy? Well, when I look at some of the survey-based data and put aside University of Michigan, because that's got some issues around it, but, you know, in general, what you're seeing is to the New York Fed, from various Fed research groups, that inflation expectations have moved

up over the last six months or so, certainly the last couple of months. So they're edging more towards 3, 3.5%. They're moving in the wrong direction. And it's not, you know, it's not extreme yet, as it might be for some of the Michigan survey data. But it's still moving up. And those break-even rates in the TIPS market, you know, moving up. So I'm surprised to hear him say with great confidence that inflation expectations are well anchored. Yeah, I'm not sure there's much I could say right now with great confidence about it. about anything. Kathy Jones and Jim Tierney, except that you're both great guests. Really appreciate it. Thank you. And both wearing pink to maybe celebrate the warm weather. All right, up next, your blueprint for

navigating Trump 2.0. Attention car buyers. Here's a story that we actually were kind of just talking about with tariffs and price increases. Automotive news is reporting Ford is telling its dealers that it may, and it may not. it may raise prices next month if tariffs continue. We got that headline, reached out to a Ford dealer, an actual Ford dealer, and he did confirm that this indeed is being discussed. We don't know if prices will go up. Ford may not know if prices will go up, but there was a notice that automotive news reported

that we confirmed with the dealer moments ago that prices may indeed go up. by the way, will automobiles or Ford or furniture or carpet or whatever, will all that stuff go up? We don't know. All right. Let's help you plan for what might happen out of Washington having to do with exactly that because trying to get it exactly right is probably exactly impossible. But we do have some of the smartest minds out there.

Try to figure it out. Joining us now is one of them. Morgan Stanley, Global Head of Fixed Income Research and Public Policy Strategy, Michael Zezis. Michael, again, thank you to you and your team. I've gotten smarter because I'm reading you and your team's work, and it really matters at a time like this. You just heard the Ford News. And again, it's sort of news-ish because we don't know if those are going to happen. I hate the term uncertainty, but I've got to imagine that this now is the definition of uncertainty. Yeah, I think it's totally fair. I think you're exactly right that there are so many plausible ways that these different policy paths, in particular the tariff path, can play out, that. that investors in generally just have to consider multiple possibilities.

Now, I think as it pertains to tariffs, I think there's good reason to have some optimism that the level of tariffs that were being talked about a couple of weeks ago ultimately won't be implemented to that degree because it looks like there's pretty good case for successful negotiation with Japan and maybe even with Europe a little bit further down the line, maybe less so with China. But there all sort of nets out to a higher tariff base than you had before, right? So even if things directionally get better than they looked a couple of weeks ago, the way our economists are mixing all together is to say we're still looking at a slower growth dynamic for 2025, somewhat higher inflation, and all as equal higher probabilities of recession. So direction of travel might feel better, but the net effect is still a murkier outlook than we had just a few weeks ago. No, but your point is really critical. I'm not trying to be a poliana about this.

The tariffs may go as they are now. You just said they may not. They may not be the numbers we think. And also, there's a big legal challenge that's going on. And another firm, one of your competitors putting out a note today saying that the courts may ultimately deem the tariffs are illegal or invalid. There are other things out there, which I think you would agree that leave a market risk to the upside. Yeah, well, so let's talk about some of the circuit breakers, right?

So one of them, to your point, is legal challenge. This is an important point because the typical tariffs are going to premise on this law called Aiba. And I'm not a lawyer, but a lot of legal scholars think that's sort of a flimsy premise for them. If a court were to put an injunction on these tariffs coming into play, that doesn't necessarily mean that they couldn't come into play eventually. There are probably studies that could be done, Section 301, 232 studies, to kind of stitch back together that authority over time. So I think all we'd be doing there is extending this uncertainty. So I do think we kind of have to live in a world where we expect that the average effective tariff rate that the U.S. is levying on the rest of the world is still considerably higher than it was

in previous years. It just will end up being not nearly as high as what was announced back on April 2nd. Yeah, do we believe that the national debt or trade deficits are truly a national emergency? That may be ultimately a question for the courts. So let's take the other side, Michael, if we do get the worst case scenario, which is upwards of 200 whatever percent tariffs on some China goods. Because remember, we already have 100 percent tariffs on Chinese electric cars put on by the former president, right?

We're not starting from zero here. And if you know the numbers, please let us know. What's your worst case-based case? Well, if we live in a world in which, you know, no more exceptions are applied than you're sort of north of 100 percent. on China tariffs and there's sort of no negotiation on the horizon, so they're there for an extended period, then our context is that very clearly kind of tips you in the recession. I think if you broadly look at markets right now, what our strategists are saying is that we've kind of priced

into equities and to credit kind of the first order effects of all of this, right? So the idea that the incremental costs that are likely to endure, we've kind of fed them through and tried to count for the pricing. But the kind of second order and nonlinear effects that could lead you into a recession, that's not really in the price yet. So one of the things I could touch that off would just be long duration of very high tariffs on China. And again, a standing question right now. Markets taking a one way, Michael Zizis of Morgan Stanley.

Really appreciate your views, folks. We're about ready to go to Scott Wobner, closing bell. Just a quick check. Markets down big. The NASDAQ composite is down, what, over about three and a half percent. 4 percent now, Nvidia is down 10 percent. market selling off into the close. We'll see you tomorrow.