Rates may not move, but markets will

Matein Khalid

As we go into Fed watch purdah for the FOMC announcement tomorrow, one thing is certain. King Jay and his merry knights of the roundtable in DC will not move on interest rates but what they say about inflation and growth could move the financial markets with a seismic shock. The consensus prices-in at least three rate cuts in 2024 but the macro data, with the wholesale/consumer price inflation for February just being the latest smoking gun, suggests that the FOMC should put Wall Street on notice that there might be no rate cuts in 2024 at all.

The bond market has sniffed something ugly brewing in the short end of the Treasury note market. The 2-year Treasury note, the security most sensitive to changes in expectations of Fed policy, has just seen its yields rise by 30 basis points in 2024 alone. This is not a good omen for a stock market where the indices seem to be at least 10% overvalued and the FOMC conclave can well burst this mini-bubble if it decides to get nasty in the Wednesday announcement and turn hawkish on inflation.

Bitcoin’s fall from 73,000 to 63,000 also reinforces my view that the Volatility Index at 14 is disconnected from the macro risk in the bond market. This was the reason I gave my “ouch alert” in my post last week as I expected higher T-bond yields and higher vols. While the “ouch” happened it was just not big enough yet a hawkish FOMC statement could set the stage for the 10-year US Treasury note to move from 4.32% to 4.50% at least and then the “ouch” on Nasdaq will turn into a scream as untold billions scramble to flee a narrow exit.

The frenzied interest in Nvidia (NVDA) has now even crept into the Dubai dinner/iftar party scene. NVDA traded at $40 billion 6-years ago and it now trades at 36X earnings and a market cap of $2.18 trillion. This has been a fairytale ride for those investors who hopped into the AI/data center infrastructure wave after the 2022 sell-off and I have tried to chronicle the macro milieu that caused the NVDA to rise from 180 in Jan-2023 to 870 as I write now. While I still believe that double/triple ordering by CTOs will cause inventory/demand shock, it will not happen until probably well into 2025. So while NVDA is a crowded trade and thus vulnerable to profit taking as we saw after the recent developer conference, I can easily imagine EPS growth at 28-30% in 2024 even though Mr. (Manic) Market has priced-in four years of demand growth as the shares rose 4X since early 2023, the fact remains that any profit taking spasm will find buyers at lower levels.

So, if I am right on my inflation/bond yield “ouch” and NVDA goes down to 780, it might not be a bad idea to have a close look at the 800 puts if the premium rises to 140 or a worst case take delivery scenario of 660. If I assume NVDA’s 2024 EPS is $24, why would I not be happy to take delivery at 660 or at 27X. This is a similar valuation to a strategic trade I had suggested in November on the 500 puts. Love put sales at 51% vols!

Also published on Medium.