Forget about the Federal Reserve's (Fed) dovish expectations that should be dialed back because the American economy is too strong to require a rate cut as early as March from the Fed. Forget that strong US economic data is not good news for the market. And forget about the fact that the rally in tech stocks should temper, to let the rest of the market catch up with the Magnificent 7. Because it isn’t happening. Nasdaq 100 hit a fresh ATH yesterday, even though the latest US data showed that the initial jobless claims fell more than expected to the lowest level in more than a year, the mortgage rates slipped after a two-week rise, and home data was better than expected, as well.
In the bonds space, the US 10-year TIP auction saw strong demand and settled at a 1.8% yield, versus more than 2% in the previous two auctions, suggesting that investors continue to see potentially high inflation while betting that the Fed should start cutting rates in a few months. Another paradox.
One weak spot is the US manufacturing sector. The weaker-than-expected Philly Fed manufacturing index came as another proof that manufacturing in the US remains weak. But who cares; US consumers spend and that’s keeping the US economy robust. The Atlanta Fed’s GDPNow forecast predicts a 2.4% growth for Q4 in the US.
The US 2-year yield was steady below 4.40%, while the 10-year yield advanced to 4.16%. There is a stronger case for the US 10-year yield to surpass the 2-year yield: the Fed cut bets and the strong economic data are supportive for the end of the 2-10-year yield inversion.
In equities, a set of stronger-than-expected US data could’ve led to a further selloff in US equities, but it didn’t. And higher US yields could’ve led to a further selloff in equities, but they didn’t.
Taiwan Semiconductor Manufacturing (NYSE:TSM), the main chipmaker of Apple (NASDAQ:AAPL) and Nvidia (NASDAQ:NVDA), jumped nearly 10% yesterday after the company said that it expects a return to solid growth this quarter. Nvidia hit a fresh record. Reflation trade is not happening, long technology is the most crowded trade of the moment. The Nasdaq 100 net long positions are at the highest levels in nearly two years. The stretched long positioning makes Nasdaq stocks vulnerable to a selloff, but the softening Fed expectations and robust AI-demand should keep the technology space well-funded.
In the FX
The US Dollar Index consolidates gains near its 200-DMA. The fundamentals and the technicals are in a comfortable place for an extension of the recent rebound. The EUR/USD is rangebound between its 50 and 200-DMAs, near the limit of the major 38.2% retracement on the October to January rally, which should distinguish between the continuation of the positive trend or a medium-term bearish reversal. I think that the latter is more likely.
The USD/JPY continues to extend gains above the 148 level, boosted by the latest inflation data from Japan that showed that inflation fell to a 17-month low of 2.6% in December from 2.8% printed a month earlier, and core inflation dropped to an 18-month low of 2.3%. The tertiary activity industry index unexpectedly dropped in November, as well. Weak economic data, combined with the earthquake at the wake of New Year encourages investors to trim their bets for Bank of Japan (BoJ) normalization and pushes the USD/JPY higher, along with a broad-based USD strength. The BoJ meets next week and will certainly push back on the normalization bets. Yet at the current levels, the USD/JPY is subject to verbal intervention from the BoJ to cool down the selling pressure. Therefore, buying the USD/JPY at the current levels is risky.