Market 02/21: Summary of January FOMC Minutes

USD 16 billion 20Y Treasury auction unfavorable

20Y Treasury auction worth USD 16 billion completely failed

High Yield: 4.595% (much higher than January auction: 4.423%)
- While market yield: 4.562%) => tails 3.3 bps.
- Percentage of bidders demanding High Yield surged: 41.13% (previous session only 5.31% demanded High Yield).
Bid-to-Cover ratio: 2.39 (lower than January session: 2.53)
Indirect bidder demand still leads: 59.08% of successful auction value.
Read more on how to interpret Treasury auction results here.

SPY plunges sharply right after 20Y Treasury auction results:

Key highlights in January FOMC Minutes

Most policymakers emphasized risks to the economy if monetary policy is eased too quickly.
- (Though a few members also pointed out potential risks if high interest rates are maintained for too long).
Fed wants to see more evidence of inflation falling to 2% (see more progress toward 2%) before cutting rates.
Members remain highly vigilant ('Highly Attentive') to inflation risks
Rates "likely" have peaked (meaning Fed may not raise rates further).

Overall, January FOMC Minutes maintain Fed's stance: wait for more economic data confirming disinflation signals before pivot.

Full meeting minutes details here.

Powell plans to prepare for the Statement on Longer-Run Goals and Monetary Policy Strategy (issued every 5 years) in the second half of 2024.

(2020 version)

Market awaits NVIDIA Earnings Report (ER)

AI frenzy makes Nvidia the market's focal point:

CNBC adds countdown ticker to Nvidia ER release time
Goldman Sachs calls it the most important stock on the planet

Tech sector down from yesterday awaiting Nvidia ER (end of today):

Reason: market skepticism on highly expected earnings, as well as overly high P/E valuation.
- NVDA FY2023 expected EPS: 4.58 USD, revenue: 20.37 billion USD

Options market predicts ^NVDA will change about +/- 10.5% after ER (stock can go up or down, direction unclear)

Prediction of the impact of +/- 10.5% movement in NVDA stock price on the market:

Currently "long Mag 7" is the main trading trend in the market => stock market will be more vulnerable to negative news flows!

Read more about NVIDIA: NVIDIA - center of the AI wave

Statements from FOMC members and market expectations

Statements from FOMC members

Barkin

January data "makes things harder" for the Fed but should not overvalue this month's data due to seasonal issues"
US is in the final stage of the inflation cycle.

Dudley

Monetary policy is probably not tight enough because fiscal policies and subsidies have pushed the necessary neutral rate higher.
- Neutral rate is the model-based (unobservable) interest rate for the Fed to achieve inflation target and full employment.

Bostics

Confident in inflation returning to 2% + wage decline trend
"Appropriate time to cut interest rates could be this summer"

Market expectations

Market expectations for the interest rate cut process continue to be pushed back:

Currently, ~22% chance Fed makes no rate cuts until July.

Options market leans towards only 1-2 rate cuts

China: expanding economic stimulus policies and bans on stock market

Lingjun Investment (large asset management fund, value > 60 billion CNY) suspended from trading for 3 days…
- … after dumping 2.57 billion CNY (~357.4 million USD) of stocks in 1 minute.

Afterwards, China issued ban on net selling stocks in first and last 30 minutes of each trading session.

Foreign investors continue reducing Chinese stock holdings, with net withdrawal value 14.5 billion CNY (~2 billion USD) in January via Hong Kong exchange.

Chairman of China Securities Regulatory Commission talks with retail investors at Beijing Financial Street.

Chinese banks approve $17 billion in loans for housing projects proposed by government.

Chinese stocks rise as support measures increase.
Read more: China and strong moves to stabilize the market

Earnings update: HSBC and Palo Alto

Palo Alto Networks

Revenue: 2.0 billion USD, +19% yoy
GAAP EPS surges to 4.89 USD thanks to tax benefits.
Non-GAAP EPS at 1.46 USD.

Palo Alto Networks stock drops -27% after cutting revenue forecast.

→ Concerns customers limiting spending despite rising cyberattacks.

HSBC: record annual profit but misses estimates

Pre-tax profit +78% to record 30.3 billion USD in 2023, below estimate of 34.06 billion USD
Share repurchase worth 2 billion USD to be completed before the next quarterly earnings report
Dividend of 21 cents/share to be paid in 1H2024 after completing the sale of Canadian business operations.

Some other news

Global debt total increased +15,000 billion USD in 2023, bringing total debt to record 313,000 billion USD
- ~55% of this increase from developed countries (US, France and Germany leading).
Biden administration will forgive 1.2 billion USD in student debt for more than 150,000 borrowers

UK Maritime Trade Operations agency (UKMTO) reports an explosion and flash of light in the southern Red Sea, 40 nautical miles west of Yemen's Hodeidah port in the Red Sea.