Published January 17, 2025
While markets have been cautious over the past few weeks, our friends at Delta Research summarize how the tide might be turning. Here is what they see:
“Since reaching a low of about 3.6% in September, the 10-year treasury rate ran up to 4.8% this week. As the rate went higher, high stock valuations and economic growth assumptions were increasingly at risk.
Rates ran higher primarily because inflation and growth measures were reported above expectations over the past several weeks.
There are reasons to believe the 10-year rate rise may be very close to reaching its peak this cycle if it did not do so already this week. Although the core CPI was up 3.2% year-over-year in the report issued Wednesday, this was better than feared and the 10-year treasury rate retreated from 4.8% to 4.6% in the wake of the report.
From a technical perspective, there have been six periods of sustained 10-year treasury rate rises since 2012. These periods lasted an average of 3.1 months and resulted in an average rise of 1.27%. The current rate rise cycle has extended for 4+ months and the rate is up from low to high by about 1.2%.
Many of the major banks and integrated financial companies reported earnings this week. The reports were better than expected. Citigroup, Wells Fargo, Goldman Sachs, Bank of New York Mellon and Blackrock traded 4%-7% higher on the earnings news. Taiwan Semi (TSM), the largest semiconductor chip manufacturer in the world, exceeded earnings and revenue estimates and traded up by about 5%. TSM revenue from “AI accelerators” tripled year-over-year. If earnings continue to surprise to the upside and the 10-year treasury rate were to level-off and subside, the equity market should be able to leg higher”.
Market update
Semiconductor stocks took flight Monday as word of “targeted” tariffs from the incoming Trump Administration encouraged investors who had been fearing a broader approach. Further fueling the tech-led advance was optimism for this week’s Consumer Electronics Show (CES) with Nvidia’s CEO Jensen Huang on tap to announce the AI-darling’s latest technology. The Nasdaq popped +1.2% Monday. But the glee was short-lived as stocks sold off Tuesday on a pair of solid economic reports which pushed interest rates further upward. The Nasdaq tumbled -1.9%. Nvidia CEO Huang’s CES presentation failed to spark the hoped-for buying as the stock opened at record highs only to fall sharply throughout the trading day. The indexes, however, held little changed ahead of Thursday’s President Carter Day of Mourning market holiday. A strong monthly jobs report Friday led to another round of selling by investors. The ample hiring caused investors to push out hoped-for Fed interest rate cuts. Interest rates surged again leaving the 10-year U.S. Treasury yield at 4.77% by the close of trading. Investors keep hoping for the sharp rise in rates to abate, fearing that a breach of the 5% level will bring a more serious wave of selling of stocks and bonds. But the slowdown has yet to occur. Friday’s -1.5% drop in stocks offered further proof that stocks are in a danger zone and reacting negatively to the month-long runup in rates.
A strong start to the week evaporated by Friday with the S&P 500 falling -1.94% this week. The Nasdaq 100 (QQQ) slid -2.19%. Small cap stocks failed to build on the prior week’s advance tumbling -3.36%.
Warm wishes and until next week.