The past week marked a significant shift in market sentiment regarding Federal Reserve (Fed) rate hike expectations. The latest update of the Consumer Price Index (CPI) revealed a slower than expected inflation rate in the US, coupled with politicians avoiding a government shutdown. Despite these factors, the index reached 4.80% for the fourth time, while briefly falling below 4.40%. The term premium on the US 10-year, which rose to 50 basis points in the previous month due to hawkish expectations from the Federal Reserve, political risks and increasing supply of government bonds, has all but disappeared amid the recent upturn. This suggests that, at current levels, investors may need renewed conviction to maintain buying momentum.
Attention is now focused on the bond auction, which is being closely watched, considering the recent weakness of the 10 and the bond auctions. The outcome may influence a possible rally or continued rally in US bond yields. Minutes from the Federal Reserve’s (Fed) latest policy meeting, due to be released tomorrow, are likely to emphasize that the Fed’s decision to pause rate hikes was influenced by rising US long-term yields in October. With the subsequent decline in yields, interpretations may vary, either indicating caution on the part of the Fed due to falling yields or a belief that inflationary pressures have eased, leading to a halt to rate hikes. .
All eyes on Nvidia
It closed above the 4500 psychological level and approached its summer peak ahead of Nvidia’s (NASDAQ 🙂) earnings announcement. Nvidia has seen substantial gains with expectations of significant revenue growth in the third quarter. Shares have risen more than 240% since the beginning of the year and more than 350% since October 2022. The company predicted its sales would soar to $16 billion last quarter. A wide gap between demand and supply should keep Nvidia on track for sustained growth, but any deviation from optimistic projections could trigger heavy profit-taking.
Elsewhere, optimism about US stocks spreads globally, with the European Stoxx testing the resistance of the 200-day moving average and the Japanese hitting a 33-year high. Support from Japan’s central bank, a cheap yen and strong corporate earnings are contributing to investor interest.
FX and energy
It fell below the 50-DMA and retreated from an all-time high. There is a reasonable direction for the yen at current levels: a positive correction. But no one knows when the Bank of Japan’s (BoJ) surprising reaction against the normalization policy will end. Japan is expected to announce an increase in inflation to 3% this Friday.
Earnings extend above 1.09 this morning on a broad sell-off in U. The next target for Euro bulls is 1.10, contingent on sustained USD weakness. However, it flirts with oversold conditions and tests the critical 200-day DMA support, indicating a possible pause in the current dollar sell-off in the absence of new news.
In energy, it is recovering as speculation that OPEC could extend production cuts puts a floor on the recent wave of selling. The next OPEC meeting is scheduled for November 26 and Saudi Arabia is considering doubling its 1mbpd supply cut. It’s a risky move and it could go both ways. Oil prices are trending downward today due to the weakening global outlook. Therefore, it remains to be seen whether this move – in haste – will attract buyers or exacerbate current global economic concerns. Tracking this week’s price action will provide insight into whether to sell a potential post-OPEC rally or take advantage of opportunities in an uptrend. If enthusiasm for Saudi Arabia doubling down on its supply cuts cannot push the barrel price above the $80-$81 per barrel range, it is probably best to sell the best.