Stocks are lower as Nvidia gets slammed again. Bonds and MBS are flat.
Nvidia is down some 34% over the past month or so as investors re-assess the AI trade. Nvidia credit default swaps have doubled to 80 basis points and about half of all investment-grade bond issuance has been AI-related. Coreweave credit default swaps are now 1200 basis points, indicating a hefty bet on default over the next 5 years.
Rates shot up on Wednesday after Fed Governor Waller proposed a 50 basis point hike in rates: “That’s my plan if things proceed as I expect. But if the October CPI inflation data out later today are similar to the past two monthly readings—with core CPI inflation around 0.3 percent or even higher—then a stronger policy move may be needed. In that case, I believe a 50 basis point hike in the policy rate should be considered at the December meeting. Hiking only 25 basis points would put our credibility at risk, a risk I am not eager to take.”
Note the speech was in the UK, so it was before the CPI which did show a core CPI rate of 0.3%. He also remarked that the labor market is weaker than the unemployment rate suggests. We are in a low hire / low fire environment and those who are unemployed are taking a longer time to find jobs. Discouraged workers – people who have been unemployed longer than six months – are elevated given where we are in the economic cycle. Younger workers, particularly college graduates, are having a tough time finding that entry-level corporate job.
He spent a lot of time talking about how high energy prices get transmitted into broader inflation and that is his biggest concern. Oil appears to be working its way lower after the midterm elections, so this may become a moot point. Crack spreads (the spread between refined product and crude oil) are moving lower after being elevated for most of the year. This is good news for gasoline and diesel prices going forward.
Mortgage applications rose 6.2% last week as purchases rose 4% and refis increased 7%. “Mortgage rates declined for the fourth straight week, with the 30-year fixed rate dropping to 7.21%, the lowest rate since mid-September. Moreover, the FHA rate was back below 7%and was more than 20 basis points lower than the conforming rate, which helped first-time home buyers currently in the market,” said Joel Kan, CMB, MBA’s Vice President and Deputy Chief Economist. “The declining trend in rates helped to spur stronger application activity, although the pace of purchase and refinance applications remain considerably lower than a year ago. Applications for conventional, VA, and FHA purchase applications saw gains over the week, with particularly strong growth for FHA and VA loans. Refinance applications also saw a relatively strong week, with a big rebound in VA refinance applications over the past two weeks.”
Credit card debt hit a record $1.3 trillion and total household debt reached $19 trillion in Q3 according to the Fed. “Overall debt has been growing,” the New York Fed researchers said on a press call Tuesday. “This does reflect financial hardship out there.”
