Higher interest rates starting to take toll

With the Federal Reserve's recent rate hikes, the impact on both businesses and consumers has been stark. U.S. companies are defaulting on loans at the quickest pace in a decade, with a notable increase in corporate defaults to 1.3%. On the consumer side, credit card delinquencies have surged, with the national average reaching 4.43% as of July 2024, up from 4.31% the previous year.  Overall, credit card debt reached a record of over $1.2 trillion.  These figures illustrate the squeeze on borrowers who are grappling with increased interest expenses, highlighting a broader economic tension as both sectors struggle under the weight of more expensive debt.

• We have long discussed the “higher-for-longer” interest rate regime will have a longer, more gradual fallout
• Given the US is a credit-driven economy, it takes time to adjust to a changing regime
• As the Federal Reserve has been unable to lower interest rates quickly, we are beginning to see early cracks
• Higher debt levels and rising defaults may just be beginning, and unless rates come down, they will likely continue
• Given inflation has been stickier than the Fed expected, we may find ourselves in a protracted period of higher interest rates
• This would result in continued defaults and related economic headwinds

Japan inflation re-accelerates

In January 2025, Japan's inflation rate reached 4.0%, marking the highest level since January 2023. This increase was significantly influenced by a sharp rise in food prices, which escalated by 7.8% compared to the previous month, driven largely by higher costs for fresh vegetables and other fresh food items. This rapid inflationary spike has put pressure on the Bank of Japan, raising expectations of potential interest rate hikes to temper the rising prices.

• Market participants keep track of Japan because it was decades ahead of the Western world in the zero monetary policy experiment we embarked on during the financial crisis
• Japan has a debt-to-GDP ratio of over 250%, which it has been able to manage given very low interest rates
• Japan has been able to keep interest rates low, given it has been battling deflation for the better part of three decades
• Now that inflation seems to be rising again, the Bank of Japan (BOJ) will have little choice but to raise interest rates
• While already at 17-year highs, projections are for two additional hikes to 1% by the end of the year
• Interest rate costs in Japan are already at ~24% of their annual federal budget, only to rise with higher rates
• In contrast, US debt service (interest) payments have risen to ~13% of our annual budget
• At some point, the credit worthiness of Japan will result in even higher market interest rates
• As the US follows, it will be important to watch how the situation unfolds

Quantum computing breakthrough

Microsoft has made a significant leap in the field of quantum computing with the introduction of the Majorana 1 chip. This development is poised to enhance Microsoft's quantum computing capabilities, potentially leading to the creation of large-scale quantum computers. These advanced systems are expected to tackle complex computations far beyond the scope of current classical computers, offering solutions across various industries, including cryptography, healthcare, materials science, and complex system simulations​.

• Quantum computing is, first and foremost, a physics problem
• If Microsoft is finally able to solve this problem it could open up a whole new world of computer science
• You have likely heard about Artificial Intelligence being hampered by our existing computing power (which is why NVDA has become one of the largest companies in the world)
• Unlocking a new way to compute would unlock the next wave of AI evolution
• The repercussions are hard to understand, but it could lead to the ability to solve problems we have yet been able to tackle
• Most excitingly, this could unlock our ability to treat diseases in completely new ways

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