The finance world was riveted by the Nvidia saga and paid less attention to the Fed speeches

Outlook

The finance world was riveted by the Nvidia saga and paid less attention to the five Fed speeches than would be usual. NY Fed Wiliams said the Fed "still has work to do to get monetary policy to the right place" and noted that inflation remains "persistent" and too high.

The 10-year has risen from 4.829% at the low on Monday to 5.149% at 8 am, up even in the last 45 minutes. This may well be an overreaction but it would also be a perfectly sane response to inflation data plus the US deficit now estimated at$404 billion in October, a stunning gain of 42% y/y.

The bond gang doesn’t like that combination. It may take a giant drop in inflation to make them forget the deficit. And we won’t get that today in the PPI, which is forecast to rise 0.4% m/m (better than 1.3% in Sept) but the y/y at 6.6% (from 6.\3%). Core PPI is expected to be 0.3%, better than 0.7% in Sept, but the year-over-year at 5%. These are multi-month highs.

The WSJ has a fascinating article that starts with this: “Artificial intelligence broke the Treasury market over the past month.”

“Rather than yields rising as the economy proved surprisingly strong, yields fell sharply from early October onward as the AI trade deflated. Investors virtually ignored upgraded growth in favor of concern about how to AI-proof their portfolio.” It took the inflation data to restore the usual relationships—but tech investors are newly impressed with the need for re-balancing to include Treasuries. This may be normal even if it looks like a stampede.

Forecast

We have no reason to forecast the dollar correcting downward in the upcoming few days except on profit-taking. The inflation is still there, the deficit is still there, the Trump clown-car is still there. Because it’s Friday, we will see some of the usual pullback (which is why we advise getting out at noon if not before).