A Potential Rate Cut-less Year?... And Rising Rates Tank Real Estate 4/10/24

0:02I thought we were contested's favorite. Live from the NASDAQ market site in the heart of New York City's Times Square. This is fast money. Here's what's on tap tonight. rate shock yields jumping on the back of the hotter than expected inflation data the 10-year back above 4.5 percent the two-year closing in on a five handle and today's move signaling the fed will rethink rate cuts for the rest of the year we'll debate that plus all the ripple effects from the bump in the bonds the real estate sector taking it on the chin small caps struggling to find their footing will go inside the numbers coming up and later the options action in the regional banks, new private company ETF taking Wall Street by storm and bucking the trend.

0:39Stock moves catching our traders' eyes in today's volatile market. I'm Melissa Lee. Come to you live from Studio B at the NASDAQ. On the desk tonight, Tim Seymour, Karen Feinerman, Dan Nathan, and Guy Adami. We start off with the major market moves after yet another hot inflation report. The yield on two-year Treasury is spiking towards a 5 % mark for the first time since last November. 22 basis point move today. That was the biggest since March of last year. Stocks, meantime, solidly in the red, though off the lows of the day. The Dow is shedding more than 420 points, its seventh day of losses in the last eight sessions.

1:10It is now down over 3.5 percent from the record hit just last month. Take a look at the drops in some of the most rate-sensitive sectors. Regional banks sinking more than 5 percent, their worst day since January. Builders dropping below their 50-day moving average for the first time since November. And small caps now negative ones again for the year. All this as the latest CPI report showed consumer prices rose three and a half percent from a year ago, the third straight month of higher than expected results. That print seemed to squash hopes for Fed rate cut anytime soon. Chances of a cut in June plunging from nearly 60 percent before the report to 17 percent now.

1:49And the probability of no cuts at all this year went from just two percent to 13 percent now. We've been talking about the stickiness of inflation for some time, what this could mean for the Fed. Guy, you especially have been on this. Well, we're seeing it manifest itself in a lot of different things now. And when you're talking about 10-year yields now, closer to the recent highs now after today than the recent lows of 3.8 percent, which should be somewhat disconcerting, I think. And when you see moves of this magnitude, I mean, that is alarming. Tim's been talking about this as well. You know, I still think yields continue to go higher from here.

2:25Maybe today was the day where the market finally woke up to the fact that yields going higher is not for a good thing. But amongst the many things that stuck out to me today, look at the volatility in the volatility index today. I mean, it was not just a straight line up and stay there. This was a lower than north of 16.5, below 15.5. I mean, volatility is volatile again, which I think also should be somewhat alarming to people out there. So we talked about it yesterday, a lot about, all right, what if it comes in a little hot, which it came in a little hot. This is sort of not, it's sort of the price action you would expect to have.

3:02It did feel like a little bit more scary, a little bit. This, you know, going down for 422 points is actually not that big of a deal. If you step back and look how far it's come, it's just the question of, oh, wow, is it really so? We're not going to get so many rate cuts this year, which we've been talking about for a long time seemed kind of absurd. We're at the start with six and now, I don't know, are we at two, one? I don't know where we are now. Somewhere in between that, I think. But interesting to me, I like the IWM. I thought we'd broaden out. That did not happen. Surprising to me, though, the magnificent four, seven, whatever you want to call it, did pretty well today, right?

3:38Most of them in the green or very slightly in the red. And that was sort of surprising to me that that would be a place that people would still feel comfortable as opposed to, oh, wow, I've made so much money in this space. Here's a little, you know, warning shot. Maybe I should sell some. That didn't happen. But this is data that shows the economy is still good, that we're still roaring. And wasn't that sort of the argument behind, you know, if we get hot numbers, it actually shows that we're in a pretty good place, that we can actually continue to grow even with this sort of restrictive territory that the Fed says we're in.

4:10I think we can. And I'm not surprised that the mega cap techs, those that aren't wounded in some way, but the ones that, you know, the three or four that are left are moving higher in a higher rate environment because they have the earnings power. They are certainly less tied to inflation. The dynamic of where, yes, core services were the culprit today on that CPI number. What that means is it's not one, it's not two, it's now three CPIs. And so the jury is certainly, you know, not out at all. I mean, it's very clear what's going on. I think we know that the Fed has to be on hold. It's probably September.

4:44There's different ways you can be kind of starting to game this. But I look at other things that are also good and bad for the economy. The fact that energy is higher, the fact that commodities are generally higher. These are things that are probably not helping the Fed. Ultimately, they may not be helping the consumer. And I think the view here is that a little bit of a headwind into financial conditions is probably good news for the Fed. No matter what happens here is if we start to see the stock market sell off and we start to get a little bit more inflation around us, I think you're going to see the impact that actually have on rates.

5:17I think rates will go higher. I think they could start to go lower before they then go higher. But that's that's probably, you know, I'm playing three, six month tactical game here. I mean, I think right now it does feel like rates can hold this level. Remember, the high of rates was about five percent in mid-October. Think of the move that the market had as rates came down. I think we've all said equities probably wake up one day and we don't know what that day is. But we said a week ago that VIX we talked about that day you shot up over 15. And I think volatility is now in the hands of the market.

5:48It's funny. I've said this a few times over the last couple of months. I mean, what's going on in the markets and across risk assets in general feels a lot like late 2021. This is the period when the Fed said basically do battle inflation. They're going to raise interest rates. They telegraph what they were going to do. We go into 2022 and they take Fed funds from basically a half a percent to four and a half percent. And we have a stock market that fairly orderly sells off, let's say, 20 percent or so. Last year, when folks start pricing in the fact that basically they're pretty much done, they did get from four and a half to the upper band at five and a half percent.

6:20We're kind of off to the races here. There was some additional liquidity that was out of the markets during the regional banking crisis, which was actually caused by the rise in interest rates, right? So I bring it back to where we are right now. A lot of things feel kind of similar in many ways to me. And it was the last bastion, you just mentioned this fab four, that actually saw money flows into them today. They were green on this sort of day. And so that reminds me a little bit of late 2021. So I say to myself, if the next move is pricing out rate cuts and then possibly raising rates, that just can't be good for equities, in my opinion.

6:52Ones that have really just acted, you know, like in a pretty reasonable sort of manner this whole period. So at some point, there's going to be something that happens that causes people to sell everything all at once. You know, the dollar today, we saw that, what was going on. We saw what was going on with yield. Gold wasn't even down a whole heck of a lot. Crude hangs in there. And I say to myself, OK, if this is all predicated on the fact that today's number, Friday's number, it says that the economy, like you just said, is OK. Well, sooner or later, the long and variable lags of interest rates going higher should kind of affect the economy.

7:24And thus, you know, maybe, you know, these multinationals are not going to have the sort of margin, you know, that they have had. And that's going to be a pressure on S &P 500 earnings. At some point, you discount that. I don't know. The backdrop, though, to this time around in terms of interest rates, where they are, is that the consumer is a lot weaker in theory than before. I mean, right now, households have spent down all their pandemic savings. They've taken on credit card debt, credit card debt. The rates on credit cards are now at record highs. So they could really be facing difficulty, particularly when you're talking about higher.

7:51We talked yesterday about electricity prices. is the average bill year on year has gone up two to three. It's only two to three percent of household spending. Gasoline is only three percent of household spending. But that's the bill that consumers open up and say, I'm paying more. And then you add to this auto insurance, which is up 22 percent in the CPI report. I mean, all these things hurt, even just psychologically. They hurt. So the consumer is combating inflation, which we've established as a problem, with credit, which is a probably as big a problem. And I don't know how that particularly ends.

8:20But in terms of the inflation story, I mean, Jeff Curry is a legend in our world. He was at Goldman Sachs for two decades. It's the Carlisle Group now. He was on Squawk Box this morning. And he says, you know, if it was just a couple of commodities, I wouldn't be that concerned. But he talked about it being across a swath of different commodities, soft commodities, industrial metals, obviously precious metals and energy. And he's concerned by it as well. So it's there. The fact that people are still thinking that rate cuts somehow make sense to me or that six in the first place made any sense was preposterous.

8:50Now I think the market's starting to figure out, wait a second, maybe rate hikes is something we should have a conversation about. For more on inflation, what the Fed minutes out today revealed about the likelihood of rate cuts, whether or not there could be a rate hike in the cards. Let's bring in CNBC senior economics reporter Steve Leisman. Steve, always great to have you with us. I mean, at what point is it not a blip, not a bump in terms of these inflation readings, Steve? Well, you know the old saying, two points to draw a line, three points to draw a trend. or there's the other saying, which is three strikes and you're out.

9:20I think we're kind of we're there, but I don't think we're actually out. Let me just tell you what comes next in the next sort of story of inflation. We start tomorrow, guys. Near term, we have the inflation action continues with the wholesale price report. That's supposed to be better behaved than consumer prices, believe it or not. Maybe you're skeptical. Maybe you should be. All the closely watched indices there you could see are supposed to come down. That'll be good news. And that'll lead to a better forecast or a more accurate forecast anyway for the core PCE. That's the Fed's preferred inflation indicator.

9:53You can see that's been running about a percentage point better than the CPI, has shown some increased improvement better than the CPI. We'll get that report at the end of the month. Now, futures markets remarkably kind of get into what Tim was talking about. They're clinging to this belief that the Fed's going to cut just further on down the road than before. Take a look at these probabilities. You guys reported we got rid of the possibility almost of a June cut. That's 18 now or 20 compared to 58 before the number. Doubt about July. But what happened? Still 66 for September. So, hey, a post Labor Day cut is now the bet rather than one just after Memorial Day.

10:32But who's thinking about vacation and days off? Not me. There's still some reason to forecast cuts besides just grasping at straws. But it's not going to happen unless inflation starts to decline consistently. what comes next? Well, rate cuts if inflation falls higher for longer if it doesn't. I just think, Melissa, the idea of a cut still out there. I've been right in forecasting a lot fewer cuts than the market has. But I still think and I'll give you one very good reason. According to the Fed's own framework, even if they cut 25 or 50, they would still be restrictive. So they need the precondition to cut, but they already have the reason.

11:10Okay. So three strikes were out. Three strikes is a trend. And I'm just wondering, Steve, if a rate hike could be anywhere out there now. I don't think so. And it sort of relates back to my last answer. The two options I believe on the table for the Fed, I could have this wrong, are holding at the current rate or cutting. The reason I don't have the hike in is because the Fed, by its own measures or metrics, is restrictive relative to where even inflation is at this higher rate. I think that's important to understand. The Fed is probably, I don't know how you want to measure it, a percentage, 150 basis points, 200 basis points restrictive.

11:57If it took 25 or 50 off the top, it would still be restrictive by that metric. What we do need is what Dan was talking about before. We need the economy to start acting in practice the way the Fed has constructed the economy to act in theory. Steve, it's Karen. Thanks for being on. Do you think that there is anything holding the Fed back politically, let's say, from if they wanted to cut it sometime before the election? June's off the table. Look, I've been looking at the data. The Fed seems to act when the Fed seems to feel it needs to act, according to most calculations, and it's caking a bunch of heat for you.

12:39Remember the Bush, the first Bush administration in the 90s took some heat for that. There have been times it's cut during election season and not. I think Powell, all things being who would like to get it done well before the election or act after the election. I just wonder, guys, when we look back at this, I'm fascinated by your perspective. Does a cut right after Labor Day going to matter that much if it comes rather than one that was right after Memorial Day? I don't think down the road it's going to matter all that much. All right. Steve, thank you. Steve Leisman. Our next guest says equities have topped for the year.

13:13Damp Spring Advisors founder Andy Constant joins us now. Andy, great to have you with us. Does this mean that we're going to see these rates go even higher, perhaps? Right. So I think, Melissa, that's the question, which is equities will only respond. We will only get a tightening of financial conditions if rates do, in fact, go higher. You know, Steve just mentioned the framework around the Fed and its claim that conditions are tight in theory, are restrictive in theory. I think he's right. It's just not in practice. And that could be because the economy can handle higher rates, which would mean that if it were not restrictive now, that inflation will stay higher for longer.

13:58And so I think until we actually see some evidence of a restrictive economy, which would be widening credit spreads, falling equity prices, widening risk premiums on assets, including term premiums on bonds, higher mortgage rates, the economy is going to still run very hot. And you can tell that not by looking at the very shortest expectation of Fed cuts, but you look out to two years now. And over two years, only 107 basis points of total cuts are priced in. So they're not going to cut much for over for almost two years. And so that just tells you that the economy is strong and it'll take more for higher rates and mostly higher long term rates for the economy to turn over.

14:52Sounds like that. Then the Fed would have to reevaluate what it believes is restrictive and and sort of reconfigure that framework that Steve was talking about. Do you think that the Fed is getting it wrong right now? Well, I think they do consider financial conditions, broad financial conditions in their framework. They focus, and there's a myopic behavior that particularly we saw in Waller's speech in December, around this very short-term real Fed funds rate that Steve described. But they also have mentioned that when rates were at 5 % in October, that higher rates were doing some of the Fed's work for them, and they would not have to cut because long-term rates were higher.

15:44Since then, they fell 110 basis points to the lows at the end of the year and are finally starting to climb back up. But at this point, they're not anywhere near as restrictive as they were in October. So I think they consider financial conditions, but they do have this myopic approach toward real Fed funds rate that seems to have backfired a bit. Hey, Andy, Tim. So let's drill into this 10 year auction and we spend time with you and we should all be spending a lot of time focused on this refunding cycle and the ones coming. But to oversimplify your answer, what's causing higher yields? Is it the macro?

16:31Is it that the buyers who typically have been more aggressive and there's certainly been a secular trend that's been going on not just this year, but for a couple of years? Or is it purely the size of these auctions? What is the biggest ingredient to this move higher in rates? So I think three things. But certainly the rates started moving higher when the last QRA came out, which was on February 1st. You started to see a significant increase in long term interest rates. And that was because the market was not prepared for$538 billion of new coupon issuance in Q2, nor were they prepared for the fact that it's likely to be$1.5 trillion of total supply of new coupon issuance between the beginning of Q2, which we're in, through year end.

17:19So there's$1.5 trillion that has to get absorbed. That's certainly impacting bond yields right now. Now, the other thing is that you're seeing rising inflation expectations, which are partly mechanical with increasing in oil prices, but also in other commodity prices, but also somewhat in expectations that the Fed has paused a bit too long in dealing with inflation as let it get away from them a little bit. And you can see that in things like gold. Andy, it's Karen. Thanks for being on. How does the sort of discussion around reducing QT, slowing QT, how does that sort of fit into what Tim brought up on the other side?

18:03Right. So if they taper QT, which I fully expect them to do in the minutes today, they mentioned it. It may not be in the May meeting, but it's certainly likely to be in the June meeting. They do have some concerns about the uneven distribution of reserves amongst the banking system, which is a small part to be concerned about. So I do expect them to taper. But once again, taper just means that they require less issuance from the U.S. Treasury to pay them back because, as you know, we do runoff at the Fed in that they just let bonds mature. In this case, they'll reinvest some more of the proceeds from that maturing.

18:43And they've handed the monetary ball to the Treasury. So to the extent they taper, that reduces the amount of issuance the Treasury has to use. If the Treasury then decides to keep coupons still at this$500 billion net per quarter and just reduce bills, the taper won't be felt by the economy and it won't be felt by the markets. If they choose to reduce coupons and reduce the amount of supply of duration that the investment community has to buy, then that would have an impact on taper. So I think by May 1st, when they do the next quarterly refunding announcement, we'll have an answer on how they're going.

19:24We may have an answer on how they plan on changing composition. Andy, always great to see you. Thank you. Andy Compton, Damage Spring. Guy? It's a really interesting conversation in terms of what the higher yields mean for the broader market. That's what we're tasked to do, right? Maybe it's a 4.5 % where things start to get interesting again and the market's waking up to it today. But I think Tim's question as to why are rates going higher, that hits the nail on the head. And they're going higher, I believe, for the wrong reasons, issuance being one of them. It's a supply-demand thing. And not that we have to get into it now, but you're starting to see the ramifications in different currencies, not least of which dollar-yen, which exploded today, the upside.

20:07The weakness in yen today was something that I'm telling you, over the next couple of weeks, the network will start talking about this in earnest. That's intervention territory. Yeah, and they, in fact, they were kind of at this place a month ago, and everybody knows what they need to do. And the irony is, of course, that what they need to do is actually, you know, by getting away from YCC and really it should implicitly bring their currency up. So, you know, in terms of the dollar amount down against the dollar. But I just look at where we are with rates. I would argue this has been a three-year move higher in rates.

20:40This hasn't just happened overnight. There's been a lot of volatility within this. And during this three years, we've had a remarkable equity rally. At some point, you know, equity investors have to do the math on this. We just haven't done it. And the question we're figuring out is what's that sensitivity level on 10 years? Coming up, cars, real estate, and private investing. Tesla tumbling on price target cuts. the real estate sector sinking as rates rise and how one firm's new ETF is letting investors get in on private companies. That CEO will join us in just a few. But first, some fast movers catching our eyes on today's sell-off, how our traders are handling these stocks when Fast Money returns.

21:18This is Fast Money with Melissa Lee, right here on CNBC.

21:30Welcome back to Fast Money on a day when many stocks took a turn for the worse. We want to take a look at a few names that managed to close in the green. Let's start off with Taiwan Semi, the trip maker up slightly today after posting its fastest monthly revenue growth since 2022 as it continues to ride the AI boom, of course, a major supplier to NVIDIA as well as Apple. Dan, what did you make of this news? Well, here's the thing. They got kind of easy comps. If you just look at like what they, you know, what went on from 2022 to 2023, and now we have 2024. We all know where these guys sit and who their customers are and demand for their products and services.

22:03So great news. I just get to a point where we're not going to be so far away where one of these companies are going to disappoint on those expectations. And the stocks are trading at levels we haven't seen from a valuation standpoint in a long time. And they seem to be very concentrated. So to me, I'm just saying, keep an eye on this, because, again, this was an Iraqi market. The stock was probably poised to do a whole host of great things, amazing things in a green market. It just happened to be the one day that we were red. So at some point, though, we're going to have disappointing guidance in the next few weeks from one of these big names.

22:33And I think it probably, you know, it's probably going to be a knock against the SMH. Next up, Alibaba, the Chinese e-commerce giant, solidly in the green today, up over 2 percent. That's on news that co-founder Jack Ma touted the success of the company's reorganization in an internal memo. while also bringing up the potential for AI in Alibaba's business. Tim? Interesting. For a stock that's been stuck in a 10 % range between 71 and 78, this isn't a reason to take it higher. The reasons to take it higher, they're also, though, talking about more growth. They're talking about price cuts in Alicloud.

23:05They're actually focused on some of that business. They're an international business, which is growing 40 % a year. They're talking about cost-cutting, and the domestic commerce is getting better. It's all going to come down to what the government wants this company to do. That, to me, is what's been the ball and chain on the stock. So it's great to hear about AI, but they're not the kind of folks to get the AI pixie dust. All right. Lastly, Macy's. The department store is settling its proxy fight with activist investor Archaus this morning. Macy's saying it will add two new directors to its board, both of whom were Archaus nominees.

23:33This, of course, comes as Archaus continues its effort to take Macy's private. Shares of Macy's initially fell in the news but surged in the afternoon to end the day up more than 2.5%. Karen? Sort of an interesting turn of events here. I mean, Macy's sort of must be a little bit worried they would have lost the proxy fight. They didn't want to face that. And if they're not certain these guys are real buyers, say, OK, we get you have some real guys on your men and women. But these are two men they put on the board who are real people to be on the finance committee to help evaluate if, in fact, they can come to a deal.