By Jamie McGeever
ORLANDO, Florida, Sept 3 (Reuters) – Remarks from Fed Governor Christopher Waller that he is inclined to hold interest rates steady later this month sparked a strong stock market rally and dragged bond yields lower on Thursday, while the Japanese yen clocked its strongest New York trading day close since the U.S.-Iran war started.
In my column today, I look at how the ownership structure – and risk profile – of the U.S. government bond market has changed over the years. Remember when China was considered the biggest threat to Treasuries? Paradoxically, Beijing’s large footprint was a source of stability, and it has been replaced by flightier, more leveraged “fast money” investors.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.
1. Fed’s Waller channels his inner John Lennon with a plea to ‘give disinflation a chance’
2. Bond selloff is likely amplified by obscure economic rate
3. US labor market remains stable; services input price rises point to elevated inflation
4. US hyperscalers’ euro thirst — lifeblood or vampire?: Mike Dolan
5. Nvidia to buy Hugging Face for $13 billion in big bet on open AI models
Today’s Key Market Moves
• STOCKS: Asia muted, Europe and UK up 0.5% or more, US leaps: Main three indices all +1% or more.
• SECTORS/SHARES: Nine sectors on the S&P 500 rise, two fall. Consumer discretionaries, financials +1.6%. Energy -0.7%. Robinhood +16%, Palantir +8%, Oracle +6%.
• FX: Dollar/yen tumbles 2% to as low as 155.30. Dollar index -0.8%. Bitcoin +5% back above $80,000.
• BONDS: Yields fall globally, come off multi-year highs. 10-year gilt yield has biggest fall in a month; U.S. yields -5 bps at short end, curve bear steepens.
• COMMODITIES/METALS: Oil up again on U.S.-Iran escalation, now +45% y/y. Average U.S. diesel hits record $5.82/gallon. Gold +2%, other precious metals +5%.
Today’s Talking Points:
This-ism, that-ism
It’s now a coin flip whether the Fed keeps rates on hold later this month or delivers the first hike in three years, according to rates futures pricing. That’s the state of play after Fed Governor Christopher Waller’s speech and Q&A with Reuters on Thursday. “Give disinflation a chance,” the influential FOMC policymaker pleaded, although he also said he would raise rates if inflation comes in hotter than expected.
In many ways, this is getting a bit ridiculous, as it now looks like a monumental policy decision could hinge on one data point, August CPI. Would a month-on-month rise of 0.26% signal a hike, but 0.24% signal no change? Similarly, would 0.26% or 0.34% prints be viewed equally? Also, didn’t Chair Warsh say only last week that “trends matter most”, and the Fed should not rely on “isolated data points”? And who said less than two months ago that “sternly staring at inflation until it melts before our withering gaze is not an option”?
Cash splash
Nvidia, the world’s most valuable company, on Thursday announced one of its biggest deals, a $13 billion purchase of popular developer platform Hugging Face. It’s a bet that support for open AI models will drive future demand even as its biggest customers develop their own chips to reduce reliance on the semiconductor giant. This follows the purchase of a $3.5 billion stake in Taiwan’s MediaTek, and up to $105 billion guarantee for OpenAI’s Ohio data-center lease.
Nvidia is trying to extend its influence and reach across the AI complex as widely as it can. But the more it does so, the more it will face accusations of “circular financing” and an unsustainable reliance on revenue from customers it is supporting via financial tie-ups. Investors are shrugging it off for now – after sliding 20% earlier this summer, Nvidia shares are up 20% in the past month.
The yen also rises
Is Tokyo – and Washington, for that matter – finally turning the yen’s tide? The Japanese currency soared 2% on Thursday, to its strongest New York session closing level since the U.S. and Israel attacked Iran in late February. The rally didn’t have the helping hand of official intervention behind it either, seemingly, making it all the more remarkable.
Traders are betting heavily on a BOJ rate hike later this month, and another 50 bps of tightening by April. It would appear Japanese and U.S. policymakers are not happy with dollar/yen above 160.00, and a more hawkish BOJ would help maintain that ‘line in the sand’ intact. But will monetary tightening be enough on its own? Japan’s bond market suggests fiscal policy will have to do some of the heavy lifting too, and that seems far less of a guarantee right now.
What could move markets tomorrow?
• European Central Bank chief economist Philip Lane speaks
• Bank of England Governor Andrew Bailey speaks
• Euro zone retail sales (July)
• U.S. non-farm payrolls (August)
• Canada payrolls (August)
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(Reporting by Jamie McGeever;)
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