Latest news with #JamieMcGeever
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8 hours ago
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Trading Day: Markets 'tarrified' anew
By Jamie McGeever ORLANDO, Florida (Reuters) - - TRADING DAY Making sense of the forces driving global markets By Jamie McGeever, Markets Columnist Bonds bounce back Global trade uncertainty cranked up several notches this week amid a flurry of court rulings around U.S. tariffs and President Donald Trump accusing China of violating a deal with Washington, ensuring world markets ended the month on a cautious footing. A clutch of economic indicators on Friday that suggested U.S. growth may be slowing more than expected also added to the gloom, making for a turbulent session on Wall Street. Month-end rebalancing flows were expected to be bullish for bonds, and that's how it appears to have turned out. After four consecutive weeks of declines, Treasuries' prices rebounded this week, particularly at the longer end, thereby bull-flattening the yield curve. The benchmark 10-year Treasury yield on Friday ended at a three-week closing low around 4.40%, partly capped by figures that showed U.S. PCE inflation last month cooled to 2.1% - to all intents and purposes back at the Fed's target. It's worth noting, however, that despite the renewed tariff chaos the S&P 500 and Nasdaq this week climbed to within a few percentage points of February's record highs. It won't take that much of a push to test them, although an impetus will be needed. What might provide that spark? The latest twists and turns on the Trump administration's tariffs, whether that's from the courts or the president's social media posts, appear to be the most likely trigger of major market moves. The U.S. Senate will start debating Trump's tax-and-spending bill - a "big, beautiful bill" as he has dubbed it - that, in its current form, is set to add nearly $4 trillion to the federal debt over the next decade. One element of the bill has unnerved investors in the last 24 hours, a tax targeting foreign investors that could potentially weigh on demand for U.S. Treasuries and the dollar. Deutsche Bank's George Saravelos warned that it could "turn the trade war into a capital war." The U.S. bond market is nervy, despite this week's rebound. The broad thrust from Fed officials' comments this week is policymakers remain in a 'wait and see' mode regarding the economic impact of the tariff uncertainty. Traders don't expect the Fed to cut rates again until September. Meanwhile, another expected interest rate cut from the European Central Bank on Thursday and May's U.S. employment report on Friday are among the highlights on next week's global calendar. I'd love to hear from you, so please reach out to me with comments at . You can also follow me at @ReutersJamie and @ This Week's Key Market Moves * U.S. Treasuries snap a four-week losing streak, with thelong end outperforming. But May is a bad month for bonds - theICE BofA Treasury index has its biggest fall this year. * Long-dated Japanese bond yields pull back from last week'srecord highs - the 40-year yield tumbles nearly 45 bps, itsbiggest ever weekly fall. * Many key equity indices have their best month sinceNovember 2023, including the MSCI World (up 5.5%) and Nasdaq (up9.5%). * Japan's Nikkei rises more than 5% in May for its bestmonth since February last year. * The MSCI Asia ex-Japan index snaps a six-week winningstreak, closing the week down 0.9%. * Nvidia shares soar 24% in May, their biggest monthly risein a year. May has been a good month for Nvidia shares of late,boosted by Q1 earnings - up 26% last year, and 36% in 2023. * The euro rises 0.4% in May, a negligible move in itselfbut enough to seal a fifth straight monthly gain, its longestmonthly winning streak since 2017. * Bitcoin falls 3% this week, retreating from the recordhigh of $112,000 to clock its first weekly decline in seven. Chart of the Week I'm feeling generous, so two charts for you this week. The first is from Simon French at Panmure Liberum. It shows that the gap between the UK 10-year bond yield and the aggregate yield of its G7 peers that exploded around the 'Trussonomics' debacle in late 2022 has not narrowed. More than two and a half years later, it is wider than ever. Investors are clearly demanding a massive premium for lending to the UK government over other G7 nations, but why? Possible explanations include: UK inflation is seen 'higher for longer', greater risk of fiscal slippage, policy credibility worries. The second chart might be gaining some attention - and raising hackles - in the White House. It shows the broadest measure of China's yuan exchange rate which, after a lengthy period of stability, has slumped to its weakest level since 2012. But unlike previous bouts of yuan weakness like the mid-2000s, this is not being driven by FX market intervention from Beijing, says OMFIF's Mark Sobel. In other words, less currency 'manipulation' and more capital outflows due to the huge challenges China's economy is facing. Either way, it will play into the narrative from Washington that global trade and currency imbalances must be fixed. But trade talks between the U.S. and China appear to have stalled, putting investors back on the defensive. Here are some of the best things I read this week: 1. Market Discipline Will Prevail in the U.S. - NourielRoubini 2. Making Sense of the New Global Economy - Dambisa Moyo 3. Failure to communicate is an economic policy risk 4. Today's global imbalances aren't what they used to be -Mark Sobel 5. Lagarde's euro 'battle cry' emphasizes EU cash need:Mike Dolan What could move markets on Monday? * Japan, UK, Germany, U.S. manufacturing PMIs (May) * U.S. manufacturing ISM (May) * Several Fed policymakers scheduled to speak at variousevents: Chair Jerome Powell, Governor Christopher Waller, DallasFed President Lorie Logan, and Chicago Fed President AustanGoolsbee Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. Trading Day is also sent by email every weekday morning. Think your friend or colleague should know about us? Forward this newsletter to them. They can also sign up here. (Writing by Jamie McGeever; Editing by Nia Williams) Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Reuters
18 hours ago
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Morning Bid: Tariffs return along with capital tax fears
LONDON, May 30 (Reuters) - What matters in U.S. and global markets today By Mike Dolan, opens new tab, Editor-At-Large, Financial Industry and Financial Markets This week's U.S. tariff whiplash has left financial markets dazed, as anxiety about foreign capital taxes and fresh rate cut hopes add to the confusion. June promises to be a tense month in an already turbulent year. It's Friday, so today I'll provide a quick overview of what's happening in global markets and then offer you some weekend reading suggestions away from the headlines. Today's Market Minute * A federal appeals court temporarily reinstated the most sweeping of President Donald Trump's tariffs on Thursday, a day after a U.S. trade court ruled that Trump had exceeded his authority in imposing the duties and ordered an immediate block on them. * The Trump administration's trade war has cost companies more than $34 billion in lost sales and higher costs, according to a Reuters analysis of corporate disclosures. * The safety of Germany's gold reserves held overseas and in New York in particular, until recently mainly a talking point for the country's far-right party and gold bugs, is becoming a matter of public debate with Donald Trump back in the White House. * While we may not see a full-blown debt crisis in the U.S., there's a growing sense that "the fiscal" matters for markets more now than it has for decades. Reuters columnist Jamie McGeever explores the assumptions baked into the current U.S. debt and deficit projections. * Reuters columnist Gavin Maguire explains why developers and exporters of natural gas should be alarmed by the decline in thermal coal exports coming out of Indonesia. Tariffs return along with capital tax fears A federal appeals court temporarily reinstated the most sweeping of Donald Trump's import tariffs late on Thursday. Allowing the stay while the case progresses, the court ordered the plaintiffs in the cases to respond by June 5 and the administration by June 9. Trump has promised to take the matter all the way to the Supreme Court. Thursday's rally in stocks (.SPX), opens new tab and the dollar (.DXY), opens new tab faded quickly, with many investors convinced the administration would seek other routes to impose the levies even if it loses its case. The whole episode raises as many questions as answers, not least regarding when tariffs will be imposed and which ones will eventually come to pass. This heightens business uncertainty as much as it offers any marginal relief. Countries in bilateral trade talks may be emboldened to avoid making concessions until there is more clarity around the legal issue, meaning we could see a shortening of the already narrow six-week negotiating period left before July 9's re-imposition of "reciprocal tariffs". Meanwhile, there are also questions over the U.S. fiscal bill now heading through the Senate, including how much delayed or reduced tariffs will impact revenue estimates and deficit calculations. What's more, investors are increasingly concerned about provisions in the bill - namely Section 899 - that allow the administration to impose taxes of up to 20% on foreign asset holdings. Some fear this could cause the tariff war to morph into a capital war, unnerving overseas investors anew. Resorting to non-tariff threats would only up the ante in tough trade talks with Europe, which is already countering with threats against U.S. tech firms. On top of all this, we have next month's annual Treasury review of overseas currency manipulation. In short, we could soon seen more trade weapons drawn into the fray. There's even growing angst overseas that foreign holdings of gold at the U.S. central bank could be at risk. But amid all the speculation, U.S. Treasuries rallied sharply on Thursday. Some of that was down to signs of weakening economic activity, with weekly jobless claims rising, pending homes sales weakening and first quarter GDP revisions cutting consumer spending estimates and showing a drop in corporate profits. That was enough to nudge Federal Reserve easing hopes back up, with futures now pricing in two full rate cuts by yearend. The drop in Treasury yields was helped by a robust auction of 7-year notes, which Morgan Stanley said left primary dealers with just 4.8% of the paper, the lowest primary dealer takedown on record for any Treasury auction. Amid all this, Trump called Fed Chair Jerome Powell to the White House on Thursday for their first face-to-face meeting since he took office in January. He told the central bank chief he was making a "mistake" by not lowering interest rates. Underscoring its independence, the Fed issued a statement after the meeting saying it "will set monetary policy, as required by law, to support maximum employment and stable prices and will make those decisions based solely on careful, objective, and non-political analysis." The April reading for the Fed's favored inflation gauge is due for release on Friday. Ahead of the open, U.S. stock futures were back slightly in the red, 10-year Treasury yields flirted with their lowest in a fortnight and the dollar (.DXY), opens new tab was firmer after Thursday's sharp reversal. Elsewhere, European stocks (.STOXXE), opens new tab were higher, but Japan's Nikkei (.N225), opens new tab relapsed more than 1%. Tokyo core inflation readings for May came in higher than forecast at 3.6%, the most in two years, upping speculation that there will be more Bank of Japan interest rate hikes ahead. European inflation updates for this month were much softer, buoying hopes of further European Central Bank easing as the ECB gets set to meet again next week. Weekend reading suggestions Here are some articles away from the day-to-day headlines that you may find interesting. * GENDER Z: In democracies worldwide, a political gender divide is intensifying among Gen Z voters, with young men voting for right-wing parties and young women leaning left, a break from pre-pandemic years when both tended to vote for progressives. Reuters' Heejung Jung, Mark Bendeich and Thomas Escritt examine this trend. * RESERVE SWITCH: Just over half of 88 central bank reserve managers said they expected the pace of reserve diversification to accelerate over the next 12 months, according to the annual HSBC Reserve Management Trends survey. Almost 80% of respondents thought de-dollarisation was increasing, though on a gradual basis., opens new tab * DEFENSE HELP WANTED: While the European Union's 800 billion euro defense spending push is expected to create hundreds of thousands of jobs over the next decade, specially trained AI engineers, data scientists, welders and mechanics are in short supply. Reuters' Michael Kahn, Christoph Steitz, Dominique Patton spoke to more than a dozen companies, recruiters and workers who said that along with hiking wages and benefits, arms makers are poaching from other sectors. * MGGA: Making Germany Grow Again is the theme of an IMF podcast with Ulrike Malmendier, a professor at University of California, Berkeley and member of the German Council of Economic Advisors. Malmendier explains how ageing Germany needs to attract more skilled migrants, rethink its capital markets and pensions system and address energy supply problems in order to resume its role as Europe's powerhouse economy., opens new tab * FUZZY FEDSPEAK: Households and professional forecasters often hear Federal Reserve speeches on inflation and monetary policy in different ways, according to a paper on Fed communications published on CEPR's VoxEU site., opens new tab * EV EVERGRANDE?: An intensifying auto industry price war in China has stoked fears of a long-anticipated shake-out in the world's largest car market. Reuters' Norihiko Shirouzu reveals how steep price cuts may signal a potential tipping point, where weaker players can no longer sustain deepening losses. * 'SACRIFICE RATIOS' AND PRICE LEVEL: Central bank research show how 'sacrifice ratios' - or output losses per inflation reduction - were historically low during post-pandemic monetary tightening. But it ignores politically toxic price level increases, something that should be included in the list of 'tradeoffs' assessed when conducting policy, according to an NBER paper by economists Kristin Forbes, Jongrim Ha and Ayhan Kose., opens new tab * DOLLAR SACRIFICE?: Donald Trump's erratic U.S. trade threats against Europe and de-funding of universities are the sorts of policies that come at a price, not least damaging the dollar's cyclical and structural outlook. Writing on Project Syndicate, former Goldman Sachs global economist and UK Treasury minister Jim O'Neill explains why he thinks the implications for the future of American power are profound., opens new tab * DRONE WARS: Indian and Pakistani militaries have deployed high-end fighter jets, conventional missiles and artillery during decades of clashes, but the four days of fighting in May marked the first time New Delhi and Islamabad utilized unmanned aerial vehicles at scale against each other. Read the fascinating report by Reuters' Devjyot Ghoshal, Ariba Shahid and Shivam Patel. * INDUSTRIAL POLICY REDUX: Government subsidies, investment incentives, and other industrial-policy actions have almost quadrupled since 2017 - mostly in critical industries such as defense, chips and high-end equipment, according to research from the consulting firm McKinsey., opens new tab Chart of the day Companies are struggling to give guidance on the rest of the year's earnings given the high level of uncertainty related to U.S. tariff policy. Today's events to watch * U.S. April personal consumption and spending and personal consumption expenditures inflation gauge (8:30 AM EDT), April international goods trade (8:30 AM EDT), April wholesale/retail inventories (8:30 AM EDT), May Chicago business survey (9:45 AM EDT) University of Michigan final May household sentiment survey (10:00 AM EDT); Canada Q1 GDP revision (8:30 AM EDT) * San Francisco Federal Reserve President Mary Daly, Dallas Fed President Lorie Logan, Atlanta Fed chief Raphael Bostic and Chicago Fed boss Austan Goolsbee all speak. * U.S. corporate earnings: Marvell Technology Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, opens new tab, is committed to integrity, independence, and freedom from bias.
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a day ago
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Trading Day: Courting confusion
By Jamie McGeever ORLANDO, Florida (Reuters) - TRADING DAY Making sense of the forces driving global markets By Jamie McGeever, Markets Columnist Tariff ruling and counter-ruling Tariff confusion reigned on Thursday as investors digested a U.S. trade court ruling late Wednesday against most of President Donald Trump's tariffs. They initially cheered the news, but by the time a U.S. appeals court reinstated the duties just before the Wall Street close, that optimism had largely evaporated. In my column today I look at how structurally higher U.S. borrowing costs in the coming years mean the fiscal 'precipice' Washington faces may be even nearer than it seems. More on that below, but first, a roundup of the main market moves. 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. U.S. court's tariff ruling gives markets short-term pop,long-term angst 2. Trump's tariff tally: $34 billion and counting, globalcompanies say 3. Trump, Fed's Powell meet at White House, Fed says 4. Nvidia discloses more China risks, but CEO praises Trump 5. Germany's return as world's top creditor may befleeting: Mike Dolan Today's Key Market Moves * Wall Street's rally fades, and benchmark indices end upa maximum of 0.4%. Nvidia shares hit a 4-month high followingthe firm's results and outlook, up 3.2% on the day and 65% fromthe April 7 low. * In Asia, Japan's benchmark Nikkei 225 index rises nearly2%, its best day in over a month, and Chinese tech stocks climb2.5%. * U.S. Treasury yields fall as much as 5 bps across thecurve, with a 7-year note auction registering strong demand. * Japan's 40-year bond yield slides 21 bps to 3.10%, itslowest in over a month and sharply down from last week's recordhigh 3.675%. * Gold snaps a three-day losing streak, rising nearly 1%to $3,315/oz. Courting confusion As if the fog of uncertainty shrouding markets wasn't thick enough, investors' visibility has been dimmed further by a U.S. court ruling that most of Trump's tariffs are unlawful, followed by an appeals court reinstating them while the appeal process unfolds. The administration will likely find other legal avenues to implement its tariffs if need be, so the net effect may ultimately be minimal. But the ruling and appeal could affect Washington's negotiations with major trade partners, timelines, and how countries play their hand. For investors, the upshot is more uncertainty and less clarity. The latest twists come just as it looked like tariff revenues were beginning to pick up. Donald Schneider at Piper Sandler on social media platform X this week estimated that tariff revenues were coming in at an annualized pace of $255 billion, up from a "norm" of about $85 billion, while analysts at UBS on Thursday said tariffs were on track to generate $300-450 billion in annual revenues. Wednesday's court ruling, however, would cut that to below $200 billion. On the other hand, of course, lower tariffs are immediately positive for growth and reduce the likelihood of retaliation from other countries. Senior administration officials downplayed the impact of the trade court block, but it is notable that Trump himself hasn't commented yet. He was busy on Thursday, to be fair. He had a "meaningful" telephone call about trade and tariffs with Japanese Prime Minister Shigeru Ishiba, then later hosted a private meeting at the White House with Federal Reserve Chair Jerome Powell. The two discussed growth, employment, and inflation, and Trump reiterated his view that the Fed is making a "mistake" by not cutting interest rates. The meeting, their first since 2019, comes a day after Fed minutes underscored exactly why policymakers haven't cut rates - unprecedented uncertainty. Before all that, investors on Thursday were also digesting Nvidia's earnings and forecasts, and revised U.S. GDP data. They have an even heavier dose of top-tier data to deal with on Friday, which includes the latest inflation snapshots for Tokyo, Germany and the United States, as well as first quarter GDP readings from India, Brazil and Canada. High yields bring U.S. fiscal 'precipice' even closer Few would disagree that U.S. public finances are deteriorating, but debt Cassandras have been warning of a fiscal day of reckoning for 40 years and it has yet to arrive, so why should this time be any different? The non-partisan Congressional Budget Office's baselineforecast sees federal debt held by the public rising to 117% ofGDP over the next decade from 98% last year, and net interestpayments rising to 4% of GDP, a sixth of all federal spending. While these eye-watering figures are concerning, it stillseems difficult to fathom the United States experiencing agenuine debt crisis where investors turn their backs onTreasuries and the dollar, the two cornerstones of the globalfinancial system. Both should enjoy strong demand – at least for theforeseeable future – even if their prices may need to fall toattract buyers. And in times of extreme crisis, like 2008 and2020, the Fed can always buy huge quantities of U.S. bonds tostabilize the market. But that doesn't mean investors should ignore the swellingtide of fiscal gloom. We may not see a full-blown debt crisis,but there's a sense that "the fiscal" matters for markets morenow than it has for decades. ECONOMIC ASSUMPTIONS To better understand the risk at hand, it's useful toexplore the assumptions baked into the current U.S. debt anddeficit projections. The CBO's comprehensive fiscal projections are a benchmarkfor many policymakers and investors. But amid the fog ofuncertainty created by U.S. President Donald Trump's trade war,the baseline economic assumptions underlying this outlook may betoo optimistic. The CBO assumes that the United States will experiencecontinuous, uninterrupted economic growth over the next it's true that since 1990 the U.S. economy has twice goneon streaks of more than a decade without experiencing arecession, conditions today - not the least of which is thecountry's bloated public debt burden - suggest that a repeat ishighly unlikely. And in the event of a downturn, U.S. public finances wouldalmost certainly suffer the double whammy of shrinking taxreceipts and a surge in benefit payments, pushing the countrycloser to a fiscal cliff. Of course, an economic downturn would probably also promptthe Fed to lower interest rates, which would likely cause bondyields to fall and offer some relief on debt-servicing costs. But investor angst over the debt may keep market-basedborrowing costs higher than they would otherwise be, somethingthat is also not baked into the CBO's central projections. And if government borrowing costs over the next decade arehigher than currently projected, the U.S. fiscal picture is evenmore troublesome than thought. YIELD CURVE ASSUMPTIONS Yield curve assumptions play a major – and oftenunderappreciated – role in U.S. debt sustainability projections. The current CBO projections are based on the expectationthat the yield curve will "normalize" in the coming year. Theyassume that the three-month Treasury yield will fall to 3.2% andthe 10-year yield will settle at 3.9%. But what if the yieldcurve stays near current levels over the next decade, with athree-month rate of 4.40% and a 10-year yield of 4.50%? Chris Marsh at Exante Data crunches the numbers and findsthat, in this scenario, federal debt held by the public couldrise to 125% of GDP by 2034 and interest payments as a share ofrevenue would approach 30%. Interest payments as a share of revenues are already aboutto exceed their late-1980s peak and may end up at the highestlevel since at least the 1950s. Adding to this concern, Saul Eslake and John Llewellyn atIndependent Economics note that if the yield curve does notnormalize, the United States could get in the dangerous positionwhere nominal GDP growth remains persistently below the 10-yearTreasury yield, meaning debt dynamics would deteriorate becauseinterest payments would outstrip growth. Given that the Trump administration's current budget bill isexpected to add nearly $4 trillion to the federal debt over thenext decade, the risk of this is especially pertinent today. One consequence of higher-for-longer U.S. interest ratesthen could be a much-heavier-for-much-longer debt burden. What could move markets tomorrow? * Japan retail sales, industrial production, unemployment (April) * Japan Tokyo CPI inflation (May) * India GDP (Q1) * Brazil GDP (Q1) * Germany retail sales (April) * Germany CPI inflation (May) * ECB Governing Council member Fabio Panetta speaks * Canada GDP (Q1) * U.S. PCE inflation (April) * University of Michigan U.S. consumer sentiment, inflationexpectations (May, final) * Three Federal Reserve officials scheduled to speak -Atlanta Fed President Raphael Bostic, San Francisco FedPresident Mary Daly, and Chicago Fed President Austan Goolsbee Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. (By Jamie McGeever; Editing by Nia Williams) Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
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2 days ago
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Trading Day: Investors shrug off Nvidia caution
By Jamie McGeever ORLANDO, Florida (Reuters) - TRADING DAY Making sense of the forces driving global markets By Jamie McGeever, Markets Columnist Hawkish Fed minutes A day of drift - stocks lower and bond yields higher - was the hallmark of global markets on Wednesday as investors, in the absence of major fresh news on tariffs or developments in long-dated bonds, waited for Nvidia's results after the U.S. close. In my column today I look at why the United States may follow Japan in looking to shorten the maturity of its debt profile, as investors turn increasingly reluctant to hold long-dated bonds. More on that below, but first, a roundup of the main market moves. 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 minutes saw rising inflation, jobless risks as ofMay meeting 2. Japan's quick-fix for bond markets sets a global testcase 3. Demand at Japan's 40-year bond auction sinks as fiscaldoubts prevail 4. Lagarde's euro 'battle cry' emphasizes EU cash need:Mike Dolan 5. ECB's Lagarde determined to complete her term,spokesperson says Today's Key Market Moves * Wall Street closes in the red, the S&P 500 and Dow off0.6% and the Nasdaq down 0.5%, tracking similar-sized losses inEurope. * Nvidia shares rose nearly 4% in after-hours tradingfollowing the chipmaker's earnings and outlook. * U.S. Treasury yields rise, by as much as 5 bps at thelonger end, bear-steepening the curve. A record $70 billion saleof 5-year notes goes well, and earlier, Japan's 40-year yieldrose after a weak auction. * Brazil's real is one of the biggest movers in FX, falling1% back through 5.70 per dollar. * Oil rises more than 1% on supply concerns as OPEC+agreed to leave its output policy unchanged and as the Chevron from exporting Venezuelan crude. Investors shrug off Nvidia caution Nvidia on Wednesday was the last of the U.S. 'Magnificent Seven' tech giants to report earnings. It announced record quarterly revenue in the first quarter of fiscal year 2026 but warned that tighter U.S. curbs on exports of its AI chips to key semiconductor market China will hit second quarter revenue. Investors cheered the news though, sending shares up as much as 4% immediately after the release. The relationship between Nvidia's share price and its long-term revenue outlook has been tight, and both were near recent highs before Wednesday's results. Nvidia said on Wednesday it expects revenue this quarter of around $45 billion, almost $1 billion below analysts' average estimate. As Deutsche Bank's Jim Reid pointed out earlier on Wednesday, there is still a "significant growth runway" required to reach the current consensus for fiscal year 2030 of around $375 billion, underlining the volatile nature of the stock. Indeed, although U.S. 'Big Tech' has taken a back seat to trade wars, U.S. fiscal concerns and trouble at the long end of global bond markets as the main drivers of investor sentiment recently, Nvidia shares haven't stood still - since the market low on April 7, they have rebounded 50%, outperforming the Roundhill 'Magnificent Seven' ETF and broader Nasdaq. The 'Mag 7' shares account for almost a third of the entire S&P 500 market cap, less than the peak of 35% late last year but up from the April low and still an extraordinarily high concentration of wealth in so few stocks. Big Tech has been quiet lately, but that's unlikely to last. The other big focus for investors in the U.S. session was the minutes of the Federal Reserve's May 6-7 policy meeting. There is usually something for everyone in these releases, but if there is one indication of where policymakers are leaning amid the fog of tariff uncertainty it may be this: "inflation" was mentioned 85 times, while "employment" and "labor market" were mentioned 23 times and 16 times, respectively. Looking ahead to Thursday, investors in Asia will react to Nvidia's earnings and guidance from after the U.S. closing bell the day before. Other highlights should be an expected interest rate cut from the Bank of Korea, revised U.S. GDP figures, and a $44 billion sale of 7-year U.S. Treasury bonds. Pressure on U.S. to follow Japan in debt profile rethink In the face off between heavily indebted developed economies and increasingly wary investors, Japan has blinked first, announcing that it will reconsider its debt profile strategy amid plunging demand for long-dated bonds. The U.S. could soon follow. Japan has the second-longest debt maturity profile of the G7 nations, with an average of around 9 years. Decades of ultra-low policy rates allowed Tokyo to borrow huge amounts at very low cost across the Japanese Government Bond yield curve. But in recent weeks, 30- and 40-year yields have soared to record highs, as appetite for long-dated paper at JGB auctions has dried up, a one-two punch that has forced officials to consider reducing issuance of long-term bonds in favor of short-dated debt. Many of the debt pressures bearing down on Tokyo are also being felt in Washington. The U.S. no longer boasts a triple-A credit rating, following the downgrade from Moody's earlier this month, and the non-partisan Congressional Budget Office projects federal debt held by the public will rise to a record 118.5% of GDP over the next decade from 97.8% last year. Net interest payments will rise to 4.1% of GDP from 3.1%, it predicts. Finally, there is Trump's tax-cut bill, which is projected to lump $3.8 trillion onto the federal debt over the next decade, according to the CBO. All this is creating understandable unease among investors, and even though foreign demand at bill auctions has remained high, on average, demand at bond auctions is the lowest in years. The Treasury may be forced to grab a page out of Japan's recent playbook and shorten its maturity profile. WAM The U.S. has the shortest 'weighted average maturity' (WAM) of all G7 countries at 71.7 months, according to the Treasury. That's due to a mix of factors, including rising deficits, Fed holdings of longer-dated bonds, and high liquidity and demand at the short end of the curve. But this figure has rarely been higher on its own terms. While the WAM reached a record 75 months briefly in 2023 and was elevated during the post-pandemic period, it has otherwise rarely exceeded 70 months. Indeed, the average going back to 1980 is 61.3 months. Shifts in the Treasury's WAM over the past half century have largely been driven by the interest rate environment, economic and financial crises and investor preference. While today's mix of market, economic and geopolitical trends is unique, it doesn't point to strengthening investor demand for long-dated bonds. The decades before the pandemic – the period known as the 'Great Moderation' – were generally marked by falling interest rates, flattening yield curves, and weak inflation. That era is over, or at least that's the growing consensus among investors and policymakers. This largely reflects the belief that inflation pressures in the coming decades will be higher than those seen during the 'Great Moderation' – particularly given the move toward high tariffs and protectionism – meaning interest rates are likely to remain 'higher for longer'. At the same time, America's apparent move toward isolationism and increased political volatility is apt to make global investors consider reducing their elevated exposure to dollar-denominated assets. That could make it harder for the Treasury to borrow long term at acceptable rates. PRESSURE POINTS These are broad assumptions, of course, and there are many moving parts. A sharp economic slowdown or recession could flatten the yield curve and spark an increase in longer-term issuance. But the curve is currently steepening, and the U.S. 'term premium' - the risk premium investors demand for lending 'long' to Treasury instead of rolling over 'short' loans - is the highest in over a decade and rising. This creates two problems. First, the Treasury may prefer to borrow longer term but not if yields are prohibitively high. Second, even though the U.S. can borrow more cheaply at the short end when the curve is steepening, this increases the 'rollover risk', meaning the government becomes more vulnerable to sudden moves in interest rates. T-bills' 22% share of overall outstanding debt is already above the Treasury Borrowing Advisory Committee's recommended 15-20% share, but it's hard to see that coming down much any time soon. Morgan Stanley analysts earlier this month outlined a "thought experiment" whereby low demand for notes and bonds could see the share of bills approach 30% by 2027. Ultimately, Treasury supply will largely depend on investor demand. If primary dealers indicate a preference for shorter-dated bonds, the 'WAM' will probably fall. Japan won't be the only developed economy rethinking its onerous borrowing plans. What could move markets tomorrow? * Reaction to Nvidia earnings * South Korea's interest rate decision * U.S. GDP, PCE inflation (Q1, second estimate) * U.S. weekly jobless claims * U.S. 7-year Treasury note auction * Several Fed officials speak at various events. They are:Richmond Fed President Thomas Barkin, Chicago Fed PresidentAustan Goolsbee, Fed Governor Adriana Kugler, and San FranciscoFed President Mary Daly. Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. (By Jamie McGeever)
Reuters
2 days ago
- Business
- Reuters
Trading Day: Investors shrug off Nvidia caution
ORLANDO, Florida, May 28 (Reuters) - TRADING DAY Making sense of the forces driving global markets By Jamie McGeever, Markets Columnist Hawkish Fed minutes A day of drift - stocks lower and bond yields higher - was the hallmark of global markets on Wednesday as investors, in the absence of major fresh news on tariffs or developments in long-dated bonds, waited for Nvidia's results after the U.S. close. In my column today I look at why the United States may follow Japan in looking to shorten the maturity of its debt profile, as investors turn increasingly reluctant to hold long-dated bonds. More on that below, but first, a roundup of the main market moves. 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. Today's Key Market Moves Investors shrug off Nvidia caution Nvidia on Wednesday was the last of the U.S. 'Magnificent Seven' tech giants to report earnings. It announced record quarterly revenue in the first quarter of fiscal year 2026 but warned that tighter U.S. curbs on exports of its AI chips to key semiconductor market China will hit second quarter revenue. Investors cheered the news though, sending shares up as much as 4% immediately after the release. The relationship between Nvidia's share price and its long-term revenue outlook has been tight, and both were near recent highs before Wednesday's results. Nvidia said on Wednesday it expects revenue this quarter of around $45 billion, almost $1 billion below analysts' average estimate. As Deutsche Bank's Jim Reid pointed out earlier on Wednesday, there is still a "significant growth runway" required to reach the current consensus for fiscal year 2030 of around $375 billion, underlining the volatile nature of the stock. Indeed, although U.S. 'Big Tech' has taken a back seat to trade wars, U.S. fiscal concerns and trouble at the long end of global bond markets as the main drivers of investor sentiment recently, Nvidia shares haven't stood still - since the market low on April 7, they have rebounded 50%, outperforming the Roundhill 'Magnificent Seven' ETF and broader Nasdaq. The 'Mag 7' shares account for almost a third of the entire S&P 500 market cap, less than the peak of 35% late last year but up from the April low and still an extraordinarily high concentration of wealth in so few stocks. Big Tech has been quiet lately, but that's unlikely to last. The other big focus for investors in the U.S. session was the minutes of the Federal Reserve's May 6-7 policy meeting. There is usually something for everyone in these releases, but if there is one indication of where policymakers are leaning amid the fog of tariff uncertainty it may be this: "inflation" was mentioned 85 times, opens new tab, while "employment" and "labor market" were mentioned 23 times and 16 times, respectively. Looking ahead to Thursday, investors in Asia will react to Nvidia's earnings and guidance from after the U.S. closing bell the day before. Other highlights should be an expected interest rate cut from the Bank of Korea, revised U.S. GDP figures, and a $44 billion sale of 7-year U.S. Treasury bonds. Pressure on U.S. to follow Japan in debt profile rethink In the face off between heavily indebted developed economies and increasingly wary investors, Japan has blinked first, announcing that it will reconsider its debt profile strategy amid plunging demand for long-dated bonds. The U.S. could soon follow. Japan has the second-longest debt maturity profile of the G7 nations, with an average of around 9 years. Decades of ultra-low policy rates allowed Tokyo to borrow huge amounts at very low cost across the Japanese Government Bond yield curve. But in recent weeks, 30- and 40-year yields have soared to record highs, as appetite for long-dated paper at JGB auctions has dried up, a one-two punch that has forced officials to consider reducing issuance of long-term bonds in favor of short-dated debt. Many of the debt pressures bearing down on Tokyo are also being felt in Washington. The U.S. no longer boasts a triple-A credit rating, following the downgrade from Moody's earlier this month, and the non-partisan Congressional Budget Office projects federal debt held by the public will rise to a record 118.5% of GDP over the next decade from 97.8% last year. Net interest payments will rise to 4.1% of GDP from 3.1%, it predicts. Finally, there is Trump's tax-cut bill, which is projected to lump $3.8 trillion onto the federal debt over the next decade, according to the CBO. All this is creating understandable unease among investors, and even though foreign demand at bill auctions has remained high, on average, demand at bond auctions is the lowest in years. The Treasury may be forced to grab a page out of Japan's recent playbook and shorten its maturity profile. The U.S. has the shortest 'weighted average maturity' (WAM) of all G7 countries at 71.7 months, according to the Treasury. That's due to a mix of factors, including rising deficits, Fed holdings of longer-dated bonds, and high liquidity and demand at the short end of the curve. But this figure has rarely been higher on its own terms. While the WAM reached a record 75 months briefly in 2023 and was elevated during the post-pandemic period, it has otherwise rarely exceeded 70 months. Indeed, the average going back to 1980 is 61.3 months. Shifts in the Treasury's WAM over the past half century have largely been driven by the interest rate environment, economic and financial crises and investor preference. While today's mix of market, economic and geopolitical trends is unique, it doesn't point to strengthening investor demand for long-dated bonds. The decades before the pandemic – the period known as the 'Great Moderation' – were generally marked by falling interest rates, flattening yield curves, and weak inflation. That era is over, or at least that's the growing consensus among investors and policymakers. This largely reflects the belief that inflation pressures in the coming decades will be higher than those seen during the 'Great Moderation' – particularly given the move toward high tariffs and protectionism – meaning interest rates are likely to remain 'higher for longer'. At the same time, America's apparent move toward isolationism and increased political volatility is apt to make global investors consider reducing their elevated exposure to dollar-denominated assets. That could make it harder for the Treasury to borrow long term at acceptable rates. These are broad assumptions, of course, and there are many moving parts. A sharp economic slowdown or recession could flatten the yield curve and spark an increase in longer-term issuance. But the curve is currently steepening, and the U.S. 'term premium' - the risk premium investors demand for lending 'long' to Treasury instead of rolling over 'short' loans - is the highest in over a decade and rising. This creates two problems. First, the Treasury may prefer to borrow longer term but not if yields are prohibitively high. Second, even though the U.S. can borrow more cheaply at the short end when the curve is steepening, this increases the 'rollover risk', meaning the government becomes more vulnerable to sudden moves in interest rates. T-bills' 22% share of overall outstanding debt is already above the Treasury Borrowing Advisory Committee's recommended 15-20% share, but it's hard to see that coming down much any time soon. Morgan Stanley analysts earlier this month outlined a "thought experiment" whereby low demand for notes and bonds could see the share of bills approach 30% by 2027. Ultimately, Treasury supply will largely depend on investor demand. If primary dealers indicate a preference for shorter-dated bonds, the 'WAM' will probably fall. Japan won't be the only developed economy rethinking its onerous borrowing plans. What could move markets tomorrow? Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, opens new tab, is committed to integrity, independence, and freedom from bias.
