US bonds extended their rally after a relatively strong auction. The 20-year US bond yield plummeted to 4.70% from 5.40% in October. It fell below 4.40%, while the , which captures the bets of the Federal Reserve (Fed), remained stable near 4.90%. The significant decline in US long-term yields compared to short-term yields widens the yield spread across the US yield curve. The gap between the 2-year and 10-year US bond yields once again exceeds 50 basis points. That means the odds of recession are increasing – again – under the usual interpretation of a yield curve inversion. Investors accept lower yields for longer-term securities because they consider a greater possibility of economic slowdown and recession. The latter also increases the chances that the Fed will cut rates for the first time in a few months. The activity in the price of Federal Reserve funds futures gives more chance of a rate cut at the May Fed meeting than otherwise. On the other hand, the fact that the 20-year auction occurred just after the US government avoided a shutdown (hence the risk of another rating downgrade) also explained why the US 20-year auction was so much better than those at 10 and 30 years. auctions that took place before the latest US CPI report and amid the uncertainty of another possible government shutdown.
Now let’s hope that the Federal Reserve minutes, which will be released today, will be much less interesting for bond traders. The Federal Reserve minutes will be a reminder that falling long-term yields were one of the main reasons the Fed decided to keep rates steady at the last meeting. Falling yields mean the Federal Reserve must remain vigilant. And it’s not just the Federal Reserve! The Governing Council of the European Central Bank (ECB), Perre Wunsch, warned yesterday that bets on ECB rate cuts are raising the possibility of the central bank raising borrowing costs again, to ensure that conditions finances do not weaken prematurely. In vain. Yields in Europe also continue to fall despite warnings, and global stocks continue to rise thanks to the persistent decline in long-term yields. The index tests the 200-DMA to the upside, yesterday’s gains extended to a new high since the summer, while the rate-sensitive one hit the highest levels since January 2022. Microsoft (NASDAQ 🙂 and Nvidia (NASDAQ 🙂 hit new records.
Nvidia will release its results after the closing bell today. The company will try to beat its own sales forecast of $16 billion in the third quarter, up from $13.5 billion the previous quarter and about $10 billion more than the third quarter of last year. Although S&P 500 CEOs reduced their mentions of AI on earnings calls, the gap between demand and supply for Nvidia chips is comfortably large to allow the company to grow at the desired pace. Better-than-expected results could push Nvidia to a new high, but anything less than stellar is about to trigger substantial profit-taking. If sentiment falters, the psychological benchmark of $500 becomes an attractive target for sellers. The US-China chip war and US restrictions on exports of advanced chips to China are the main sticking points for future sales projections.
In both cases, volatility can be expected after the results announcement of the most beloved and intriguing company of the year. Options trading implies that we could see a positive or negative swing of around 8% after the earnings report is released.
Elsewhere, HP, Lowe’s (NYSE:) and Best Buy (NYSE:) are also expected to report earnings today and their sales are expected to have slowed due to lower consumer and business spending.