The US bonds extended their rally after a relatively strong US 20-year bond auction. The US 20-year yield tanked to 4.70% from 5.40% back in October. The US 10-year yield slipped below 4.40%, while the 2-year yield, which captures the Federal Reserve (Fed) bets, remained steady near 4.90%. The significant fall in US long-term yields compared to the short-term yields widens the yield spread across the US yield curve. The gap between the US 2 and 10-year yield is back above 50bp. That means that the recession odds are mounting – again – according to the usual interpretation of a yield curve inversion. Investors accept lower yields for longer-term papers as they price in a higher possibility of economic slowdown and recession. The latter also boosts the odds for the first Fed rate cut in a few months from now. Activity on Fed funds futures price in more chance for a rate cut in the Fed’s May meeting than otherwise. On a side note, the fact that the 20-year auction came right after the US government averted a shutdown (hence the risk of another rating cut) also explained why the US 20-year auction was much better than the 10 and 30-year auctions which were conducted before the latest US CPI report, and amid the uncertainty of yet another possible government shutdown.
Now expect the Fed minutes, due later today, to be much less exciting for bond traders. The Fed minutes will come as a reminder that the falling long-term yields were a major reason why the Fed decided to keep rates steady at the latest meeting. Tanking yields mean that the Fed must stay alert. And it’s not only the Fed! The European Central Bank (ECB) Governing Council Perre Wunsch warned yesterday that the bets on ECB rate cuts are raising the possibility the central bank will hike the borrowing costs again – to make sure that the financial conditions don’t loosen before time. In vain. Yields in Europe continue falling despite warnings, as well, and global stocks continue to surf on persistent fall in long term yields. The Stoxx 600 index tests the 200-DMA to the upside, the S&P500 extended gains yesterday to a fresh high since summer, while the rate-sensitive Nasdaq hit the highest levels since January 2022. Microsoft and Nvidia hit fresh records.
Nvidia is due to release earnings after today’s closing bell. The company will attempt to beat its own prediction of $16bn sales in the Q3, up from $13.50bn a quarter earlier and around $10bn more than the Q3 of last year. Even though the S&P500 CEOs cut down their mentions of AI in earnings call, the gap between the demand and supply for Nvidia chips is comfortably large to allow the company to grow at desired pace. Better-than-expected results could send Nvidia to a fresh high, but anything less than stellar is poised to trigger substantial profit-taking. If confidence falters, the $500 psychological benchmark becomes an attractive target for sellers. The US-China chip war and the US curbs on advanced chip exports to China are the major sticky points for future sales projections.
In both cases, expect volatility in the wake of the earnings announcement of the year’s most loved and intriguing company. Options trading implies that we could see a positive or a negative swing of around 8% after the earnings report hits the ground.
Elsewhere, HP, Lowe’s and Best Buy will also expected to report earnings today and their sales are expected to have slowed due to weaker consumer and corporate spending.