Poor Auction

Macro Perspectives

5 Points

• Stocks in the US closed mixed on Wednesday, as investors digested a strong batch of earnings from tech companies.

• The S&P 500 finished marginally higher, the Nasdaq 100 added 0.3%, hitting fresh records high, while the Dow Jones lost 98 points.

• Concurrently, chipmakers and tech shares experienced gains after chipmaking equipment maker ASML Holding reported quarterly results that surpassed expectations.

• Nvidia rose 2.5%, reaching an all-time high of $613.69; Microsoft added 0.9%, closing at all-time high of $402.56, Meta also gained 1.4% to hit a record high of $390.7.

• Conversely, AT&T lost 3% after falling short of earnings expectations, and Kimberly-Clark declined 5.5% after disappointing earnings.

---

Macro Perspectives

The kings of the technology revolution continue to lead the stock market - Nvidia, Microsoft and Meta (Facebook) all made new record highs.

But a bad Treasury auction spoiled the moment; Stocks went down, Yields went up.

The Treasury has a ton of bonds to issue (money to raise), to finance a bloated deficit. So supply is heavy, and it's being met with weak demand - which means higher yields are required to find the demand. That creates deserved scrutiny about the unsustainable U.S. debt load/rising debt service cost, and the continued extravagant spending on Capitol Hill.

With that, we've had two similar bond auction hiccups over the past two months. But as you can see, neither could break the momentum in stocks - and that momentum was triggered by the Fed's November meeting, where Powell signalled the end of the tightening cycle.

Yesterday’s episode in the bond market comes as stocks are printing record highs. It was enough to reverse the tide and as the day ended, the S&P 500 had given up all of its gains. Now, unlike the two prior episodes in the chart above, the poor bond auction looks more likely to be a catalyst to break the momentum in stocks - particularly considering the big economic data points that are coming over the next two days.

We have Q4 GDP today which is expected to come in at half the rate of Q3. On Friday, we get the December inflation data (core PCE).

Earlier in the week we talked about how based on the recent estimates from Fed Governor Chris Waller, the 12-month change in core PCE would come in lower than the Fed projected last month. It would leave the 6-month average annual change in core PCE at 1.9%, and the 3-month change at just 1.6% - both under the Fed's target.

Lower inflation sounds good to most, but that would be concerning territory for the Fed (i.e. deflationary risk).

Keep in mind, the Fed has successfully convinced the markets that it won't be aggressive on the timing and the number of rate cuts it will deliver this year.

So, if the data over the next two days comes in weak, things are set up for a market that will perceive the Fed to be overly tight, and making another big policy mistake.

That would weigh on stocks . . . and, of course, this all leads up to the Fed meeting next Wednesday.