while WE slept: USTs pulling back, NQ outperforms (NVDA +5%, early) and USD bid on '47' tariff-talk; DeepSeek impact on econ, Fed, stocks and bonds ... Global Wall weighs in ...
ZH: 5Y Auction Stops Through With Largest Direct Award In 12 Years
… Dept of Treasury and newly minted chair, Scott Bessent, must be happy at somewhat lower yields achieved. Can / will they parlay this in to this afternoons $44B 7yr auction? One can only hope — NOT a strategy — so here’s a quick and shorter term look …
7yy DAILY: 4.45% (July ‘24) peak and a (red) bearish (upward)TLINE would appear to be a spot to watch …
… as 7yy ‘rejected’ what looks increasingly like a ‘double top’ up nearer 4.70% and in this process of rejection, momentum moved from overSOLD (then) to now more overBOUGHT and this does NOT bode well as far as an auction setup (ie concession) … Now, to be fair, it didn’t seem to matter yesterday …
Dip-OR-tunity ahead? Yesterday’s auctions went very well as noted above BUT far from mission accomplished as these liquidity events were backstopped by what was an early DeepSEEK deepfake out of markets along with some data …
ZH: "2025 Is Going To Be Great" - Dallas Fed Manufacturing Survey Soars Near 4-Year-Highs
ZH: US New Home Sales Rise For Second Straight Year In 2024
… um wait, what? Housing on a tear? 2yrs in a row? Didn’t Barrons sound the ‘Bond Alarm’?
By days end …
ZH: DeepSeek Sparks Chaos Across Markets; Bloodbath In Big-Tech, Bitcoin, & Black Gold
… AND … here is a snapshot OF USTs as of 608a:
… for somewhat MORE of the news you might be able to use … a few more curated links for your dining and dancing pleasure …
NEWSQUAWK US Market Open: NQ outperforms with NVIDIA +5% pre-market, USD gains on punchy Trump tariff rhetoric … Bonds continue to pullback from Monday's largely tech-driven highs, supply in focus … Overall, USTs are pulling back this morning as tech/market sentiment looks set to attempt a slight recovery from the substantial pressure seen on Monday, with NVDA higher by around 5% in pre-market trade. Supply the scheduled point of focus for the session ahead. Follows on from mixed auctions on Monday where the 2yr tap was a soft auction but was followed by the 5yr which experienced a much better reception. Today, USD 44bln of 7yr Notes are on offer after a 2yr FRN sale. As it stands, USTs are softer to the tune of c. 10 ticks at a 108-25+ low.
Opening Bell Daily: DeepSeek tanked NVDA … DeepSeek just handed Nvidia a $589 billion one-day loss … The Chinese AI startup tanked the entire US stock market.
Finviz (for everything else I might have overlooked …)
Moving from some of the news to some of THE VIEWS you might be able to use… here’s some of what Global Wall St is sayin’ …
Here’s a case of how resilient the economy has been / remains specifically as it relates TO higher rates …
BARCAP: December new home sales show second straight monthly increase
New home sales increased 3.6% m/m, to 698k, alongside a cumulative downward revision of 12k to sales estimates from September-November. Despite continually elevated mortgage rates throughout December, sales showed strength and there was increased demand for new builds.
… same shop discussing rates and FED …
BARCAP UPDATE: Federal Reserve Commentary: January FOMC preview: Pausing amid uncertainty
We expect the FOMC to hold rates at 4.25-4.50% next week, starting a potentially extended pause, and to provide little information about future changes, as it awaits more clarity about the economy's evolution. We retain our baseline that the FOMC will cut rates 25bp this year, in June.
Here’s a note we should all pause and read as it asks a question which should be on all our mind after yesterday’s bell-ringing sputnik like moment in the AI marketplace …
Recent headlines related to DeepSeek, an AI technology developed in China, suggest that AI technology may be less computationally intensive to develop than previously thought.
We think cheaper AI means more AI, more quickly, with a faster productivity boom and less need for capital investment gated by land-use rules and other old-economy constraints.
We think the negative impact on economic growth of reduced data center investment – assuming there is one – is likely too small to impact monetary policy. We think business investment in AI software might rise to offset, or even dwarf, any such decline.
…Wealth effects likely modest absent large moves: As things stand, the tailwinds from past rises in house and equity prices are shaping up to be quite positive for 2025, and were part of why we recently upgraded our estimate of H1 2025 GDP growth. Based on a straight read of consumer spending elasticities, we would (all else equal) see these positive wealth effects contributing about 0.5 point to GDP growth in 2025. Moreover, broad financial conditions as measured by our (or the Federal Reserve’s) financial conditions indices are easy, supporting investment.
We think a very large move in equity valuations would be necessary to achieve a recession based solely on wealth effects. A shock similar to the 2001 bubble unwind (a ~50% decline in the broad equity market combined with wider corporate credit spreads) would, in our view, generate enough wealth-effect headwinds to produce a shallow, 2001-like recession.
“Vibecession” risks more salient for Powell: Transformative technological change creates winners and losers, and it stands to reason that the consumer of AI technologies – individuals and firms outside the technology industry --- may be the main winner from the release of a high-performing open-source model. This creates the risk of significant market volatility over time, should DeepSeek’s reported innovations stand scrutiny…
…Risks to monetary policy cut both ways… We think current markets were focused on the risk of a significant correction in high-flying technology stocks and the possibility that such a correction could have real economy effects. However, if the dust settles without a large correction, we see scope longer term for a further hawkish tilt to policy should this higher productivity, higher r* and higher investment world come to pass. This would be particularly the case if these shocks came in the context of a US economy already growing somewhat above trend, with already firm inflation, and with incoming trade and immigration policies likely to put upward pressure on inflation over time.
Same shop interrupts with a DM RATES OUTLOOK (thinkin ‘bout supply) …
BNP: DM rates outlook 2025: Cautious optimism as supply hits highs
With little appetite for fiscal consolidation and QT ongoing, we see G4 sovereign supply at an all-time high of USD3.46trn net of QT in 2025. Supply should spike in May and June, as well as in September, when we expect a peak at USD357bn.
In US rates, we see Treasury yields stabilizing at current levels as markets have priced a modal “no-cut” trajectory for 2025. Yields should fall in H2, with 10y ending 2025 at 4.20%, as cooler growth and a resumption of cuts in 2026 are priced in. We see a case for marginal bull-flattening, as markets reverse some of the 4Q24 bear steepening.
We see TIPS as attractive in this scenario, as Fed hawkishness, cooling growth and tariff risk make for lower real yields and wider breakevens – akin to 2019…
… USD rates: Nearing their peak
Treasury yields will likely head sideways from current levels early this year, we think, before eventually moving lower in H2 2025. We see 10y yields ending Q4 around 4.20% (see table above).
Pricing a (pre-emptive) hawkish Fed: In our 2025 outlook published in December, we projected 10y yields to reach 4.65% by year end, with our key call being that a hawkish Fed would not cut rates at all this year. Our Fed view has realized much sooner, as the FOMC pre-emptively hedged inflation risks with a hawkish message and dot plot at the December policy meeting. Now 10y yields are already near 4.65%.
Same catalysts, different timing: We continue to see the same catalysts driving US rates in 2025 that were noted in our outlook, namely i) higher-than-expected inflation, ii) disappointing growth and iii) a hawkish Fed unlikely to cut rates this year. The third catalyst, i.e. Fed hawkishness, has already been largely priced to a level we would call the edge of the “hike zone” (see chart at bottom right). With markets on the edge of the “hike zone” and historically high term premiums, a sustainable run toward a 10y yield of 5% looks unlikely. Instead, we see downside growth risks underpriced in US rates and we anticipate lower yields in H2 2025.
What about Treasury supply? We see Treasury raising auction sizes at the August refunding, and the market impact will depend on the rate environment at the time. If investors are focused on cooling growth in H2 2025 and don’t expect an incrementally hawkish Fed, rising supply may have limited impact on yields.
USD curve: Bull flattening risk…
…TIPS: A bumper year ahead?… …Attractive entry levels post December FOMC: With 10y real yields around 2.20% and nearing their expected peak in the current cycle, entry levels for long TIPS positions are attractive (we prefer owning 10y TIPS – see discussion of USD curve on page 6). The December FOMC outcome made TIPS significantly more attractive, as the Fed seemed to pre-emptively hedge upside inflation risks in 2025, even without details of potential immigration and tariff policies – which are likely needed by investors to buy breakevens. Real yields rose much more in 2024 election pricing than in 2016 (see chart at bottom right).
…Supply: Up, up and away
…Money markets: Slow and steady wins the race to IORB
This next note, same shop, appears in reflex / response TO the deepfake selloff …
Cleaner positioning backdrop: We think a cleaner US equity positioning (BNPEPUS) backdrop prior to Monday’s DeepSeek-ignited sell-off leaves US equities less vulnerable to a further explosive move lower. This presents a dip-buying opportunity for the AI bulls ahead of six Mag-7 earnings in the next two weeks. The DeepSeek news reinforces our bullish software view into 2025 (see US EQD Outlook, dated 20 December 2024), where lower training costs will benefit software companies. Previously we suggested positive delta structures on NOW, CRM and MSFT, which Exane is bullish on today ( Exane view). We maintain our bullish software view.
Opportunity to BTD in the AI trade: Monday was NVDA’s largest one-day decline since the onset of Covid in March 2020. The DeepSeek news calls into question the sustainability of AI training revenue. We think the short-term reaction is overblown with hyperscalers likely to maintain capex guidance in the next two weeks. With SMH down 10% on Monday and lagging IGV by 8%, we close our bearish Feb25 SMH risk reversal for a gain of 4.9% and suggest short-term tactical bullish trades on NVDA and AVGO to cover earnings on 26 February and 7 March (estimated) respectively.
Implications for the AI power trades: The AI power trades fell even more than the AI capex trades, with VST -28% and GEV -21%. Exane rates both names outperform and we suggest upside structures for a tactical bounce-back on the AI power and nuclear themes. The Mar25 expiry captures the bulk of AI power earnings. For investors in the D1 space, consider long BNPUAIPO & BNPUAINU
Fig. 1: Cleaner US equity positioning (BNPEPUS) prior to Monday’s DeepSeek-ignited sell-off leaves US equities less vulnerable to a further explosive move lower. We see dip-buying opportunities for the AI bulls ahead of a raft of earnings
Interrupting DeepSeek, the economy and some thoughts on DM rates and US stocks to bring you … well a few words / VISUALS — techAmentals — of shares, from one of the very best …
CitiFX: US stocks: In a range, but be wary of a dip
Price action over Monday following the DeepSeek developments has brought us lower from the recent highs in Nasdaq 100 futures as well as S&P e-minis. Weekly momentum for both are ticking lower from overbought territory. While our base case remains for both to hold in a range, we warn that losses could extend to the tune of 4-6% from current levels, according to techs …
…Nasdaq 100 futures (NQ1): Nasdaq 100 futures have tested 20745 on Monday, the triple top neckline and Dec 20 low, though we have since retraced back above the 21000 handle. Our short term base case for now is still a range between 20745-22152 (Dec high). Short term support remains very strong, and weekly momentum is ticking lower, suggesting that a break above the 22152 resistance in the short term is less likely.
That said, we are on a close watch for a potential decisive close below 20745, which would turn the picture bearish with a triple top formation in play. The triple top formation suggests a target of ~19337 IF we see that come into play. However, we think that we would find strong support before that at 19907-20009 (200d MA, Oct 31 low), which accounts for a ~6% move from current levels.
Back TO DeepSeek and US economy (recession?) and so, an accelerated rate cutting cycle coming …?
Over the past few years, forecasters (including ourselves for a period) have consistently expected a significant slowdown in growth driven by weaker consumer spending. This slowdown has not materialized. In this note, we consider whether the latest potential driver – a tech driven selloff in equity markets that hits household wealth – could ultimately slow the US consumer.
We present a simple model of consumer spending driven by real disposable income, net worth-to-income, consumer sentiment and bank lending conditions for consumers. The model matches the pre-pandemic experience closely and would have predicted 3% real consumer spending growth in 2024 – exactly in line with the expected outcome.
As a counterfactual, we show that the model would have predicted slower consumer spending in 2024, about 2%, if equities had not rallied. While this suggests potential downside to consumer spending if the equity selloff sustains enough to meaningfully dent household wealth, we also consider several upside risks for the consumer. Ultimately, we remain constructive on the consumer and continue to anticipate that growth will exceed consensus expectations this year.
In the last couple of weeks, we’ve been working on a chartbook comparing today’s markets with that seen in the run-up to the dot-com bubble bursting in March 2000. With the emergence of DeepSeek over the last week and the sharp equity sell-off yesterday, it’s hopefully even more relevant now.
We first look at crude equity valuations today vs. 2000, and then at the top 10 stocks in the US index back in 2000 against today. We show that four of the top ten constituents in the S&P 500 in March 2000 now have lower nominal earnings than they did back then. This demonstrates the inherent uncertainty and volatility of individual companies’ earnings, even in a market where earnings in aggregate have gone up c.6% p.a. over the last 70 years. The largest company in 2000, namely Microsoft, now makes nearly ten times as much as it did in 2000. The largest stocks in the index today hold a much larger weight than the largest stocks in 2000.
… We are way ahead of 2000 in terms of the weight of the very largest US largest stocks. For the top 5, the weighting has gone up from around 18% in 2000 to 28% today. So, the big are even bigger than 2000 and have bypassed the “Nifty Fifty” from the late 1960s/early 1970s
With the current huge focus on the Mag-7, we highlight their last 5 and 10yr earnings growth rate and compare it with analysts’ forecasts for the next five years out to 2030. We then run various scenarios as to where each Mag-7 PE ratio would be in 2030 if analysts’ forecasts were correct, stress testing for different earnings and price scenarios.
We then look at long-run US earnings growth and show how it’s outperformed nominal US GDP in recent decades, arguably accelerating above the long-term trend in the last decade, and potentially countering some of the CAPE overvaluation arguments.
We then move more macro, and show that for the wider US economy we are now in a much higher profit era relative to GDP than we were in 2000. Wages take a much smaller share of the pie than in 2000 as a result, even if net worth is now much higher. The 2000 period saw 17 consecutive quarters with GDP growth above 4% (annualised). So a very turbo-charged growth period with M&A at completely the other end of the scale to today. Animal spirits were everywhere, unlike today where they are arguably more heavily concentrated.
Lastly, any comparisons with 2000 can only really be made in the US. European equity valuations are much lower today than in 2000….
We’ve read ‘bout DeepSeek impact on US economy now, we should then also consider a more mundane facet of this development …
MS: Future of Energy: DeepSeek: US Power Infrastructure Implications
The DeepSeek news caused an over-reaction among US stocks with exposure to AI growth. We highlight data points indicative of strong AI inference growth, show the (low) degree of AI upside priced into many stocks, and focus on key open questions that will drive our views on US AI infrastructure.
Key takeaways
We believe the market reaction among US power names with AI exposure is overdone, and highlight stocks with mis-priced AI infra growth upside.
US AI infrastructure will continue to grow rapidly, in our view - we include analyses indicative of a high % of US data centers focused on non-training tasks.
We expect to see large US data center announcements, using a range of nuclear and natural gas-fired power, with renewables to reduce net carbon emissions.
We developed an analysis of the cost of compute, which shows a ~90% reduction in a 6 year period, in turn driving rapid growth in AI adoption (and inference).
Within this note, we highlight key uncertainties/open questions that could drive us to be more pessimistic on the magnitude of AI infrastructure growth.
Switzerland offers recap of the days data … better but far from ‘good’ housing …
…All told, today's report saw the level of new sales 44K above the December 2023 level, and the series currently sits within its 2017-2019 range (see chart below). Simultaneously, inventories are elevated — today's data saw completed unsold inventories rise 1K to 118K, above the 2005 level (see chart below).
… AND of course, a few words on the DeepSeek dip-OR-tunities …
UBS: Intelligence weekly #19: DeepSeek concerns offering deep discounts across 5 tech baskets
Overnight, tech stocks fell sharply on concerns around China's DeepSeek and its impact on AI, with double-digit declines in semiconductor stocks. While we recommend investors to focus on upcoming quarterly results and management's comments in order to assess the actual impact, we think the undue selloff offers good opportunities to revisit.
In this report, we highlight five tech baskets with stocks sourced from CIO's AI portfolio which longterm investors can use to build strategic exposure.
With volatility expected to stay elevated through the upcoming earnings season, investors can take advantage through structures like put writing and buy the dip in quality AI stocks.
Valuations of stocks from Mr. Stocks for the longrun …
Wisdomtree: Professor Siegel Weekly Commentary: Markets Resilient Amid Historic Week and Fed Meeting in Focus
…Trump’s pro-growth stance, particularly regarding AI, continues to bolster tech stocks. The $500 billion commitment to AI infrastructure underpins the ongoing growth narrative, and there are no signs of momentum faltering in this sector. Recent earnings data reinforce optimism, with few companies issuing downward revisions. While some concerns about valuation persist, particularly around the AI and tech sectors, these fears often stem from flawed comparisons. For instance, using the nominal 10-year Treasury yield to assess equity risk premiums overlooks the fundamental difference between nominal and real yields. Adjusting for inflation via TIPS, the forward-looking real return on equities still exceeds that of bonds by a wide margin—there is no “negative equity premium.”..
AND one more time on housing and strength (despite rates?) … how’s this readin’ through to rate cuts …?
WELLS FARGO: New Home Sales Strengthened in December Builder Incentives Shore Up Sales, but High Mortgage Rates Still a Headwind
Summary New Home Sales End 2024 on a Positive Note New home sales bested expectations and rose 3.6% during December, the second consecutive monthly gain. The solid sales print adds to the evidence that the temporary late-summer dip in mortgage rates spurred a pick-up in residential investment in the fourth quarter of 2024. More recently, mortgage rates have crept up and are currently hovering around 7%. Although the new home market has become less sensitive to changes in interest rates thanks to home builders' ability to offer rate buydowns and other pricing incentives, the elevated stance of financing costs threatens to discourage home buying in the months ahead. Elevated new home inventory levels and improved availability in the existing market stand as additional headwinds.
… And from the Global Wall Street inbox TO the WWW … a few curated links …
The share of companies planning to raise prices remains elevated and has started to trend higher, see the first chart below.
Combined with the recent jump in ISM services prices paid, see the second chart, this points to upside risks to inflation going forward.
Source: NFIB, Haver Analytics, Apollo Chief Economist
And a view from The Terminal …
BLOOMBERG: There's a DeepSeeking whale in Nvidia's moat The chipmaker that dominated the AI landscape (and stock market) as we knew it has now been deeply disrupted.
This week is packed with economic updates, so let’s get started! On Monday, we’ll see the Chicago and Dallas Fed Indexes, followed by the Richmond Fed Index on Tuesday. These should give us a sneak peek at what the January ISM Index might look like.
The week heats up even more with big releases like the preliminary Q4 GDP figure, the Employment Cost Index (ECI), and personal income (including core PCE). But let’s be clear - all eyes will be on the Fed come Wednesday. While some are speculating about political pressure, we’ll be focused on what the Fed has to say about inflation.
Don’t miss Wednesday’s Consumer Confidence report—it could give some insight on where the yield curve and monetary policy might be headed. Bottom line? It’s going to be a busy week in the markets, so stay tuned.
