Academia Embraces A.I.

MONETARY

• In the release of the FOMC Minutes pursuant to the September meeting, participants and staff offered some additional commentary and perception into recent economic developments, as well as monetary policy actions¹
  • Insight was offered into prior equity market volatility that was experienced across the globe in August, which was primarily due to the unwinding of various carry trade positions¹
    • (Federal Reserve) “That episode saw some large moves in U.S. and foreign equity indexes, equity-implied volatilities, the dollar–yen exchange rate, and Treasury yields. These sharp moves appeared to be the result of a rapid unwinding of some speculative trading positions induced by unrelated events—such as the unexpectedly inflation-focused communications from the Bank of Japan (BOJ) in late July and the weaker-than-expected U.S. employment report in early August—and amplified by technical and liquidity factors. All told, the unwinding process was contained, and market functioning recovered relatively quickly”¹
  • On the topic of economic growth, participants noted that recent growth had come in stronger than expected – but also reduced forward looking expectations by a small amount to account for labor market changes¹
    • (Federal Reserve) “The staff forecast at the September meeting was for the economy to remain solid, with real GDP growth about the same as in the forecast for the July meeting but the unemployment rate a little higher. Although real GDP growth in the second quarter was stronger than the staff had expected, the forecast for economic growth in the second half of this year was marked down, largely in response to recent softer-than-expected labor market indicators. The real GDP growth forecast for 2024 as a whole was little changed, though the unemployment rate was expected to be a little higher at the end of the year than previously forecast.”¹
  • Regarding the outlook for inflation, participants noted that strong progress has been made towards the Fed’s goal of achieving stable 2.0% inflation, while also noting some additional developments on the inflation situation¹
    • (Federal Reserve) “In their discussion of inflation developments, participants observed that inflation remained somewhat elevated, but almost all participants judged that recent monthly readings had been consistent with inflation returning sustainably to 2 percent. Some participants commented that, though food and energy prices had played an important part in the decline in the overall inflation rate, slower rates of price increases had become more evident across a broad range of goods and services. Notably, core goods prices had declined in recent months, and the rate of increase in core non-housing services prices had moved down further. Many participants remarked that the recent inflation data were consistent with reports received from business contacts, who had indicated that their pricing power was limited or diminishing and that consumers were increasingly seeking discounts”¹
    • (Federal Reserve) “With regard to the outlook for inflation, almost all participants indicated they had gained greater confidence that inflation was moving sustainably toward 2 percent. Participants cited various factors that were likely to put continuing downward pressure on inflation. These included a further modest slowing in real GDP growth, in part due to the Committee’s restrictive monetary policy stance; well anchored inflation expectations; waning pricing power; increases in productivity; and a softening in world commodity prices.”¹
  • Labor market conditions were seen as becoming increasingly more balanced, with the gap between demand and supply of workers continuing to close¹
    • (Federal Reserve) “…the labor market was now less tight than it had been just before the pandemic. As evidence, participants cited the slowdown in payroll employment growth and the uptick in the unemployment rate in the two employment reports received since the Committee’s July meeting, lower readings on hiring and job vacancies, reduced quits and job-finding rates, and widespread reports from business contacts of less difficulty in hiring workers.”¹
    • (Federal Reserve) “With regard to the outlook for the labor market, participants noted that further cooling did not appear to be needed to help bring inflation back to 2 percent”¹
    • (Federal Reserve) “…that labor market conditions remained solid, as layoffs had been limited and initial claims for unemployment insurance benefits had stayed low. Some participants stressed that, rather than using layoffs to lower their demand for labor, businesses had instead been taking steps such as posting fewer openings, reducing hours, or making use of attrition”¹

 

FISCAL

• In fiscal year 2024, the U.S. Government recorded its 3^rd highest Budget Deficit ever, only being outpaced by pandemic-era budget deficits³
  • The budget deficit for fiscal year 2024 came in at $1.833T
    • (Reuters) “The deficit for the year ended Sept. 30 was up 8%, or $138 billion, from the $1.695 trillion recorded in fiscal 2023. It was the third-largest federal deficit in U.S. history, after the pandemic relief-driven deficits of $3.132 trillion in fiscal 2020 and $2.772 trillion in fiscal 2021.”³
  • Interest costs on the Government’s outstanding debt continued to tick higher due to higher interest rates, as well as larger amounts of debt outstanding³
    • (Reuters) “The biggest driver of the year’s deficit was a 29% increase in interest costs for Treasury debt to $1.133 trillion due to a combination of higher interest rates and more debt to finance. The total exceeded outlays for the Medicare healthcare program for seniors and for defense spending.”³
    • (Reuters) “Other drivers of increased outlays for the fiscal year included Social Security, up 7% to $1.520 trillion, Medicare, up 4% to $1.050 trillion, and military programs, up 6% to $826 billion.”³

 

GEOPOLITICS

• The European Union has implemented punitive tariffs on Chinese EVs, which are set to vary greatly 7.8% to 35.3% depending on the company who produces the EV. These new tariffs are in addition to the existing/standard 10% E.U. import duty²
  • These tariffs are taking effect almost immediately after their announcement, and set to begin on October 30²
  • Tariffs come in response to the E.U.’s anti-subsidy probe which effectively concluded that Chinese EV makers were receiving unfair subsidies from the Chinese Government, which drastically reduces E.U. automakers ability to compete with those firm’s on price²
  • In a statement, the Chinese Commerce Ministry noted that this decision remains unacceptable, and that further negotiations are needed to come to a mutually beneficial agreement²
    • (China Commerce Ministry) “”China does not agree with or accept the ruling”²
    • (China Commerce Ministry) “We also noticed that the EU side indicated it would continue to negotiate with China on price commitments”²

MISCELLANEOUS

• In an extremely noteworthy development in the timeline of artificial intelligence, the 2024 Nobel Prizes for both Physics and Chemistry were awarded to individuals who pioneered the use of artificial intelligence for both general and field-specific applications⁴
  • The 2024 Noble Prize for Chemistry was awarded to two individuals from Google DeepMind (Demis Hassabis & John Jumper) for their efforts in contributing to the creation of a groundbreaking model known as AlphaFold, as well as David Baker for the explicit creation of entirely new proteins⁴
    • AlphaFold is an artificial intelligence model that has been able to largely solve a previously unsolved problem in chemistry as it relates to predicting the structure of proteins, given an initial set of inputs⁴
      • AlphaFold is already being used to greatly accelerate the development of new drugs and therapies to address medical problems deemed ‘unreachable’ by conventional methods⁴
  • The 2024 Nobel Prize for Physics was awarded to Geoffrey E. Hinton & John J. Hopfield for ‘for foundational discoveries and inventions that enable machine learning with artificial neural networks⁴
    • Geoffrey E. Hinton has been largely considered the ‘godfather of AI’ by many in the field⁴

[See Below for Disclosures & Annotations]

 

DISCLOSURES

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The companies presented here are for illustrative purposes only and are not to be viewed as an investment recommendation.

Tax laws and regulations are complex and subject to change, which can materially impact investment results. LPL Financial does not provide tax advice. Clients should consult with their personal tax advisors regarding the tax consequences of investing.

 

ANNOTATIONS

1. The Federal Reserve. “Minutes of the Federal Open Market Committee”. October 9, 2024
2. Reuters. “EU slaps tariffs on Chinese EVs, risking Beijing backlash”. October 30, 2024
3. Reuters. “US budget deficit tops $1.8 trillion in fiscal 2024, third-largest on record”. October 18, 2024.
4. Nobel Prize Organization. “NOBEL PRIZES 2024”. October 11, 2024