The selloff in US bonds extended to a second day on the back of crowded hawkish comments from Federal Reserve (Fed) members and on the surprising strength for the US economy. The latest ISM data printed yesterday showed that US services grew at their biggest pace in four months, screaming that the US economy is too resilient and too healthy for the Fed to start cutting the rates in a hurry. As such, the US 2-year yield approached the 4.50% level and the 10-year yield flirted with 4.18. The US sovereign bonds were better bid in Asia today, the US 10-year paper is expected to see a limited upside potential above 4.20%, but a March rate cut is off the table, and activity on fed funds futures gives no more than a two-thirds chance for a May cut – which remains quite high and could be further curbed.
Naturally, the US dollar extended its rally above the 100-DMA and is roaring against all majors since Friday’s jobs data. But note that the other central bankers won’t sit quietly, turning their thumbs, faced with the rate cut bets. The Reserve Bank of Australia (RBA) for example kept its policy rate unchanged at today’s meeting and warned that a further monetary policy TIGHTENING cannot be ruled out if needed. The AUDUSD found buyers below 65 cents.
Saying the obvious
The OECD also warned central bankers that it’s certainly too early to declare victory on inflation because growth remains resilient. According to their latest forecasts, global economic growth will slow to 2.9% this year, from 3.1% last year. It’s above their November forecast, but not all locations have the same bright outlook: the US forecast has been revised higher by 0.6 percentage point, while the euro area economic outlook is downed by 0.3 percentage points. The euro area’s economic divergence is due to its higher vulnerability to higher rates and the energy crisis – as duh, Europe has no fossil energy and can’t pump like crazy as the US does. And all that sums up to the same conclusion that I have been trying to convey since weeks: the Fed is in a better position to keep rates steady than the ECB. And that divergence should translate into a softer euro against the dollar. The EURUSD fell to 1.0723 yesterday as the soaring US yields and the stronger dollar hit all majors across the board. We could see the euro’s selloff slow after a big two-day slide, but the euro outlook remains bearish as the economic data on this side of the Atlantic doesn’t look as encouraging as on the US coast and it would only make sense if the ECB started cutting the rates before the Fed, which would imply a further euro weakness.
Nvidia defies gravity
In equities, the extension of yesterday’s selloff weighed on major US indices, but not too much. The S&P500 retreated by a meagre 0.32% from an ATH, as MAMAA stocks eked out a small gain while Nvidia gained another near 5% because Goldman Sachs upped its price target to $800 per share. Nvidia traded at the doorstep of $700 per share yesterday, another $100 rise is peanuts at the current momentum. There won’t be much to stop investors from buying – other than crazy valuations and deeply overbought conditions – before the February 21st earnings. The question is not whether Nvidia could rise to $800. It is whether it could consolidate gains after the results.
Turning the mill with carried water
Buying Chinese equities feels like catching a falling knife. The Chinese stock markets are in a better shape this morning as authorities came up with fresh measures to stop bleeding in Chinese stock markets. This time, China announced trade restrictions on domestic institutional investors and some offshore units, and imposed caps on some cross-border swaps that could be used to short Hong Kong stocks. They also told some brokers not to reduce their exposure to mainland shares. But all these measures are essentially attempting to turn the mill with carried water – they have been inefficient to trigger a sustained recovery and they will hardly bring investors back on board. The major worry is the Xi-led government’s radical change of mindset, which involves severe government crackdowns on the former investor gems like Alibaba and Tencent and the destruction of the Chinese dream. Throwing money into the mix is a clumsy quick fix, it won’t fix confidence.