Bonds, Oil and Nvidia Create a Market Mess

Detailed summary

Bonds came under heavy pressure on Thursday after hawkish comments from Fed officials, oil rose on worries about Iran, and when you throw in the Nvidia drama, we had a market mess…

Yields jumped on hawkish Fed comments, and the AI issues are far from resolved.

Bonds came under heavy pressure on Thursday after hawkish comments from Fed officials, oil rose on worries about Iran, and when you throw in the Nvidia (NVDA) drama, we had a market mess. The indexes bounced after a weak open, peaked about an hour into the session and then trended lower for the rest of the day. Breadth was only about 25% positive.

Small caps, which have little to do with the Nvidia issues, were the weakest. The iShares Russell 2000 ETF (IWM) fell 1.6%, and that signals that interest rates are the bigger problem.

The selling in bonds picked up after San Francisco Federal Reserve President Mary Daly said inflation pressure is up, not down, and that her bias is that further tightening will be needed. Daly is usually one of the more moderate voices at the Fed. She said that she increasingly hears companies say they will pass on higher costs, and she warned that inflation is bleeding into services, where it tends to stick. Cleveland Fed President Beth Hammack added that spending on AI infrastructure is contributing to inflation. The AI build-out already had voters and lenders lined up against it, and now a Fed official is blaming it for inflation.

The 10-year treasury yield pushed above 5.1%. Wednesday’s rally came with the bond market closed, and this is the reaction I was concerned about once it reopened.

The afternoon auction of 30-year bonds didn’t help. It priced at a yield of 5.44% and drew the weakest demand since June. That is the second soft treasury auction this week, after Tuesday’s sale of 10-year notes. When the government has to pay up to borrow, everyone else does too, and that hits small caps the hardest because they depend more on borrowing.

Oil added to the inflation worries as crude rallied after President Trump said the U.S. doesn’t need a deal with Iran.

Ironically, Investor’s Business Daily (IBD) bumped up its recommended exposure on Wednesday night following…

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