Rate Rip Higher… And A Middle Market Pulse Check 1/8/25

0:02Live from the Nasdaq market site in the heart of New York City's Times Square this is Fast Here's what's on tap tonight. Heading higher, 10-year yields at levels not seen since April. The rapid move in the last month having an outsized effect on some sectors. We go under the hood to find out what it says about the market. Plus a quantum conundrum. The stocks tied to the next level of computing technology plunging after a massive recent run. What spooked investors and where the trade goes from here. And later, Fast Money turns 18 today. We'll take a look back at the humble beginnings of the show and a look ahead at just how much has changed in the business world and markets since day one.

0:36I'm Melissa Lee coming to you live from Studio B at the NASDAQ. On the desk tonight, Tim Seymour, Karen Freyman, Dan Nathan, and Guy Adami. That's not them. That was the Nathan's show. Here they are. Here they are. Guy, you get better with age, buddy. But surely wiser on this Paswani birthday show. All right. But before we get to the celebration, we start off with rates ripping higher. The 10-year yield up 60 basis points in just the last month. The move putting pressure on major averages, the Dow losing 4.5 % in that period, the S &P 500 down nearly 3%, and the Nasdaq dropping almost 2%. But a closer look may suggest that even bigger problems are looming.

1:17Rates-sensitive sectors like homebuilders, regional banks, small caps plunging over the past month. So do these moves signal that cracks in the market could spread even further? Guy? Well, happy anniversary. I wore a jacket for the occasion, which I never, ever do. But I'll say this. I mean, that is the story. And again, it's not – wasn't the inversion in the yield curve? That's the warning sign. It's the re-steepening. And now the 2s, 10s are as steep as we've seen in quite some time. But I don't think a lot of people anticipated 10-year yields a month and a half, two months after the Fed started cutting rates to be 4.7 percent.

1:51And I still think they're going higher. For whatever reason, the market is starting to care. I think it's going to care more the higher it goes. And this is a global problem. It's not just in the U.S. that rates are rising. Japan is over a percent, for instance. Japan, to me, is a lot more dramatic. I mean, let's talk about a 13-year chart in Japan on JGBs, the 10-year which got up, you know, and really have been crescendoing higher. In other words, I'm not even sure this is a level that we're going to rest at. And there is an argument that we've made that global rates are going to also partially pull up U.S.

2:23rates. There's been an argument about where Japan is. They have inflation. The question is, what are they going to admit to and what are they actually going to do? But, you know, Japanese investors have been relative value buyers of treasuries. There's still a major discrepancy on that spread. Meanwhile, Chinese yields continue to go through the post-COVID lows. In other words, there's a real sense that the Chinese deflationary spiral is spreading. But everywhere else, there is pressure upward on rates. Yeah. The Fed minutes were really interesting today, I thought. Steve Leisman, when they first came out, had this assessment that two-thirds of what was in the minutes would have been the case for holding or raising rates.

2:57And I thought it was very bearish as well for markets. Well, that was interesting. And I think that that presser, which was ultra hawkish, sort of reflected that. He said if you'd read these minutes and known what the outcome was, you wouldn't have thought those two things would go together. So that was sort of interesting. This idea that the Fed thinks about what if these policies happen and what do we need to do in front of that, where normally they just wait, see what are the policies and then how do we respond? So all that having been said, though, I did cover a little TLT today just because I feel like it has moved so much.

3:32And and then that auction was actually that that actually wasn't anything to be afraid of this one. But I do think if things are going up for the right reasons, there are some industries that can do well in this. Banks, for example, right? Rising rates could be a good thing for banks. Not so great if you don't earn a lot of money and it's all huge earnings, you know, expectations in the future discounted back at a lower rate. And we're going to get a sense of that, right? And Q4 earnings. Let's see how much we're going to hear constant currency, right? We're going to like let's let's see what these companies that have a lot of exposure overseas have to say about that and what that means for growth.

4:08And we know that you just mentioned the small caps, Mel. I mean, this is a sector where the cost of capital is high. The servicing the debt is high. And, you know, again, they're going to be subject to issues as it relates to tariffs if we do have a trade war. But this brings me back to late 2021 when the Fed started to signal they're going to raise interest rates to battle inflation. And what sold off right away is things like quantum computing. I mean, like not the same things. But if you thought about SPACs, if you thought about unprofitable tech, if you thought about crypto, that sort of thing, you know, look at today.

4:34I mean, there was a lot of that in the markets today. You also saw some of these mega cap, the fateful eight. Those things reversed after the opening. They were all green after late meaning. What does that mean? It's a mag seven plus Broadcom. You know that, Tim. We've done away with the mag seven. And now we're the fateful eight. The market is in the fate of those eight stocks. And I don't mean to sound so pessimistic. But when you put a lot of that price action together, that sentiment together, and you say to yourself, Q4 earnings better be great. And people better have confidence in that 13%, 14 % expected EPS growth year over year for the S &P 500.

5:05Because if there is not a lot of confidence as we get into February, then we are going to have a sell-off. Are we going to have a sell-off greater than 10 %? Probably not, if you just look at the sell-offs that we've had over the last couple of years. But the one thing is, and Guy feels this way, if we have the 10-year back above 5%, and it's not like a kiss like it was in 23, if it looks like it's establishing a new range, that has to weigh on equity valuation. Yeah, I agree. I'm glad Tim brought up China because right before our eyes, you know, that currency has been sort of going the same type of levels that we saw seven or eight years ago where the market got concerned, number one.

5:37Number two, it's fascinating that the yen continues to weaken with their interest rates going higher. And something's about to give there. There's going to be some sort of intervention over the next week or so without question. And we'll see how that plays out. The last time it happened in a meaningful way was in July on a CPI day, if I'm not mistaken, on a Thursday. Dollar M was 161. Ten minutes later, it was 157. And by September, we got down about 139 or so. And that was around that August 5th date. So there's a lot out there outside U.S. to be concerned about. I think about the world of, again, interest rates and what it could mean and where equities have also come from during a period.

6:16If we go back to April 25th, which is where we hit that intraday 470 today, S &P was at 5 ,000. So you can say, well, it rallied a lot on higher interest rates, but rates really pulled back. So, you know, we're in an environment where I think it sets up Friday's payroll number to be a huge number because get a sense that you have a much stronger labor market than the Fed really signaled when they cut by 50. That was really what they were doing. And they pointed out, we're now here to defend the labor market. If the labor market doesn't need any defense at all, and in fact, we had a jobless claims number today, which is a noisy data series, but that four-week average is back to April of 2024 numbers.

6:51There's zero sign that the labor market's falling out of bed. If you actually see signs that there's actually more tightness there or strength or wage pressure, which is certainly what we kind of inferred from the ISM number that came out two days ago or yesterday, that's the stuff that I think actually it's crazy. You go from we had the growth scare back in August, and now we actually might have the other growth scare, which is actually we're growing too fast. Right, right, right. Right. No, I agree with that. Although I come back to the same thing. If we're growing, we're good. For some industries, I think that parts of the market is good.

7:24And I think when you talk about that earnings expectation for the S &P, I think it's sort of a barbell where you have some that are growing much faster than that. We need those to perform, for sure, right? We need the fateful aid. I like what you did there. You know, one thing I'll just mention, I know this is a guy named, but Dollar General made like eight, ten-year lows today. And we talk about this kind of K-shaped recovery. We talk about the trade down that we've seen into Walmart, but the very low end, it really does not act well at all. And that has to say something about what is the spiral effect we're going to see if we do start to see unemployment get a little worse.

7:56I mean, right now, what are we, 4.2 or something like that? And a lot of folks, what do we get down to 3.6 at the lows? I mean, there's going to be a breaking point at some point where people are going to be like, OK, you know, maybe there's some artificial stuff going on in this jobs data. And we know that the new administration is going to do everything they can to keep that going. But if mass deportation happens, who knows what the heck happens? That is, to me, a potentially really big monkey wrench in the employment. All of these things are inflationary. Tariffs, immigration policy. All these things are looming.

8:24And this all lines up with what a lot of strategies were predicting last year, and that is a correction in volatility in the first quarter, right? A pullback in the first quarter. Here we are, although it's rates that are causing it here at this point. And currencies. And volatility. Currencies, yes. I mean, I'll say this as well. Well, Katie Stockton over the summer talked about this, and I'll say she was right, that once volatility starts to embed itself, it doesn't go away over time. It usually lasts, you know, nine to 12 months, and I think we're probably six months into this thing. And I think early this year, vol is going to be a story.

8:54And on rather benign days, you've seen spikes in the volatility index. You saw it on December 18th, again on the 27th. I think you'll see a lot more of it into the year. For more on rates in the market, let's bring in Mike Schumacher, head of macro strategy at Wells Fargo Securities. Mike, great to have you with us here on set. What do you make of this move in rates that we've seen over the past month or so, and where are we headed? Pretty messy, frankly. From our point of view, what really changed things was Powell's comments on December 18th. We were, I'd say, modestly bullish until that point.

9:24Once he spoke, we said, no, done. Fed might cut a couple more times, but there are no rush to do it. So why do you want to be long bonds at that particular stance? You probably don't. So from our standpoint, being long something like a four or five year treasury, fine. Ten year, 30 year, no particular reason to get long at this point in time. Right. I read in the notes that you seem to think that yields are not reflecting all the risks that are currently out there. So what are the risks that are not in the move higher yet? And how much higher can we move on those risks? Yeah, it's really interesting, Melissa.

9:56When you think about markets, I'd say right now you've got so many different possibilities with this combination of central banks shifting gears, inflation, maybe it's sticky, maybe it's not, politicians getting into the fray, not just in the U.S. How many governments have fallen over the last couple months? Probably five, six. A lot of things to try to calculate. So from our standpoint, you can imagine a case where let's say Republicans actually get their act together, despite the Speaker thing, and manage to pass legislation, not just extend the low taxes we have today, but cut them further.

10:27Budget deficit takes a hit, gets much bigger. people say, wow, this is bad news. Long-term rates can go up a lot. At the same time, if tariffs come in and they're big and broad-based, not just an extra 5 or 10 percentage points against China or something nutty against Mexico, but broad-based, other countries retaliate, that is almost universally bad for growth. You could see maybe not a global recession, but a slowdown. So in that case, I think people are underpricing the risk that yields go down a fair bit. So you've got one case where rates go up a lot on the long end, Another, which is maybe a 10 % or 20 % probability, has them coming down quite a bit.

11:01So it's very difficult to try and sort out for investors and for your viewers all these odd scenarios now. Tim brings this up a lot. What about the strength in the dollar, which doesn't seem to want to go down at this point? And at a certain level, I think that's going to be a tremendous headwind for equities. Yeah, I'd agree with that, Guy. It's interesting. It makes me want to lean against it because pretty much every client I talk to says, oh, yeah, strong dollar, strong dollar. But you go through the arguments, and you all made a few a couple minutes ago. China, for instance, right? Big economic weakness, a lot of stimulus, lower yields.

11:32Contrast that with the U.S., pretty strong economy, higher rates. That big gap ought to drive the dollar a lot higher. I think it will. And yet client after client says the same thing. Dollar, euro, vacation pricing looks pretty good if you're sitting here in New York. Yeah, let's go to London, Paris, whatever. Why not? It's 103. Does it go to parity? We think it does probably in the next couple months. So I can make a lot of really good arguments for the dollar strengthening. I think it's difficult to get in the way of that right now, but I'd agree with you. Eventually, it becomes a pretty tangible headwind.

12:00Mike, you might have just alluded to this with the sense that the dollar's going higher. That seems to be where our – your macro strategy guy, where are the global macro funds? What's their trade for this year? We can look back on last year, and we can see where there were some obvious places this group played. These are some of the biggest funds in the world. What's the strategy? I think they're trying to figure that out, Tim, because they hit the Trump trade pretty well. So you had to say, well, all right, rates go up, equities rally, dollar strengthens, boom, I'm in. So if you got even a couple of those right, it was a great year.

12:26But I'd say for this year, it's much more of a tough calculation because Trump's already in. That trade's run a fair bit. Do you really want to load up right now? Probably not. So I think they're trying to sort that out. They'll probably take their cues over the next month or two, I would think, in the U.S. once a new administration comes in. We actually see what it can do with Congress. Don't know yet. And once some of these tea leaves start to settle overseas, too. Michael, great to see you. Thank you very much. Thanks to be here on the 18th, too. Thank you very much. It's well known across Wall Street you turn 18 today.

12:58Legal now. Yeah, exactly. We can't drink, but we can vote. We can vote. We wouldn't drink anyway. No, it's a family show. Milk. What's your trade for the year? What is my trade for the year? I'm always long. I know. So I'm staying always long. You know, of course, I'm afraid of I have a lot of mag seven ish faithful eight kind of exposure. But I still think there's legs to that story. Yeah. Yeah. I mean, listen, I think the concentration in faithful eight is kind of disturbing. I said that last year. I said it probably be two years ago. At some point, it's going to matter. I go back to the view about 2021.

13:35It was mega cap tech after a lot of the really risky sort of stuff sold off. That's what led the bear market down. And I think people forget that Netflix, Tesla, You know, a handful of other names sold off 75 percent from their highs. NVIDIA sold off 75 percent. People don't think that can happen. I'm not saying that's going to happen. But if this Gen. AI thing doesn't materialize this year the way people expect to from a use case scenario, these stocks are going to go down because the pull forward enthusiasm, the pull forward in multiple, the spend that's happened is going to weigh on their growth.

14:08And especially if we hit a tough spot in, you know, in the economy. So, I mean, to me, that's kind of dangerous right here. And, you know, again, I said that six months ago, but it becomes increasingly dangerous as rates go up and then we have this kind of weakness abroad. I just want to say one last thing there. Microsoft, when they put out that$80 billion number for CapEx and spend on infrastructure as it relates to Gen A, they said half of it's going to be here. Half of it's going to be global. If the globe slows down, they're not going to be spending$80 billion. Well, so let's try to thread this into where I think, you know, the last bit of the market is really what's going on with mega cap tech, what's going on with semiconductors.

14:42And if we look at where we were in March of 2024, semis got out of the gates up 30 percent. Semis are effectively, at least as a group, and some did a whole lot more like NVIDIA. But if you look at that group, that group's up four percent almost in 10 calendar months. And so the question is, where's the leadership going to come from? I think we are going to stay more concentrated in that group than a lot of people want. But right now, that's the question. All right. Meantime, we are watching shares of NVIDIA after hours falling on a report that President Biden is looking to put further restrictions.

15:12on exports of NVIDIA and AMD AI chips. NVIDIA just responding to the news saying, every data center is being accelerated and every business and application is incorporating mainstream AI. A last minute rule restricting exports to most of the world would be a major shift in policy that would not reduce the risk of misuse, but would threaten economic growth and US leadership. Shares are now down nearly 10 % since hitting a record high earlier in the session yesterday. We talked about this yesterday with Katie Stockton. And it was a major, it was a reversal, hit the high, closed on the low. It was like 200, 300 percent of the average daily volume, guys.

15:48So heavy volume on that day. And what does that mean to you? 100 percent. I mean, I traded, I think, 375 million shares yesterday. So almost twice normal volume. You're right to point that out. Made an all-time high. Closed on the lows. The same formation we saw in March. The same formation we saw in June. In March, the stock went down about 35 percent from March into middle of April. In June, it took a lot less time. It was down into August, probably 40, 45 percent on that August 5th low. I think you're setting up exactly the same way. I'm not a hater, but history is repeating itself. And the amount of volume yesterday should really give people concern.

16:24I'm not sure people were putting in their NVIDIA risk book that you were going to see export controls. It's just not. I mean, we know where they've been. We're not. We're not. I mean, we've already had out there the China dynamic with regards to chips. But, you know, if you look at a broader policy moment here for this stock, it's not what I think is in the price. I think what's been questioned about the price is the growth and the delta on the growth, which has been slowing but still really impressive, and that the multiple still makes it a lot more attractive than other big mega cap semis. And in that context, I like it.

16:57I think you've got to sort through this. Yeah, I just think one of the most important things for this name happened earlier this week. Jensen Wang at CES, he goes, he takes the stage Monday night. He's the keynote. everybody wants a piece of what he's got to say. And it wasn't enough. You know, the stock was down six and a quarter percent yesterday. The reversal today, while it closed flat in this news tonight, I mean, I don't think it's particularly interesting. What I think is most interesting is not just the China ordering that we've seen and what these curbs might be. It also goes back to the concentration, you know, for those companies, Microsoft, Google, Amazon and Meta, you know, they make up 40 percent of their order book of their revenues.

17:29And so if we're going to see a slowdown in just demand, that's why the CapEx numbers, when we get them on earnings over the the next few weeks is going to be really important. I just think there's probably other better places to play this theme than NVIDIA right now. Coming up, a quantum leap lower. Quantum computing stocks plummeting after NVIDIA's CEO pours some cold water on the sector's timeline when he believes this tech will be up and running and if these stocks are still investable. And Fast Money's 18th anniversary continues with a very special guest joining us later this hour. And keep this in mind, Apple announced its first iPhone the day after our debut.

18:03Netflix was just about to announce its plans for a streaming service. It was still delivering DVDs and folks are singing to the left, to the left, as Beyonce's irreplaceable top of the charts. Now she's a country star. And oh, how much has changed. Much more Fast Money in two. This is Fast Money with Melissa Lee, right here on CNBC.

18:34Welcome back to Fast Money. Wildfires raging across Southern California with more than 80 ,000 people under evacuation orders in the Los Angeles area. The Palisades Fire exploding to over 15 ,000 acres as of 4.30 p.m. Eastern time. The Eden Fire at more than 10 ,000 with two deaths confirmed. Officials say the fast-moving fires are 0 % contained with strong winds fanning the flames. And the blaze is having an impact beyond immediate danger zones. nearly 300 ,000 customers without power as of this morning and air quality at dangerous levels across L.A. At least 1 ,000 structures have been destroyed, and it could be a long road ahead for cleanup and reconstruction.

19:14For more on the fires and the impact they'll have on the insurance industry, let's bring in CNBC's Contessa Brewer. Contessa. Melissa, even with the fires burning out of control right now, we're getting very early damage estimates from J.P. Morgan analysts, putting insured losses at about$10 billion. But AM Best says it's just too early to define the damage. But that high value of lost real estate will generate large economic losses. Of course, a lot of homeowners' policies were canceled over the last couple years, and that meant a surge of new policies for the FAIR plan, the last resort insurer in California.

19:50225 % growth over two years, including both residential dwellings and commercial properties. Pacific Palisades is in the top five concentrated areas of exposure in Southern California for the fair plan. And it warned last year that its financial stability is at risk if it can't pay. And then all the insurers would have to chip in. That's a real threat. That's why some of the smaller insurers have actually left the state. State Farm has the most market share, 8 million policies in California. Farmers a close second. Travelers, Allstate, Chubb, and USAA in the top 10. Now, years ago, Chubb began managing down its exposure in the regulated market where rates have to be approved.

20:32Instead, it writes property insurance for high net worth individuals under its excess and surplus line. Those are not subject to approval. AIG and Pure also offer the high end policies. And what we're seeing here, look, these are high end properties in Pacific Palisades and Malibu and the like. So these are the companies that could actually see some impact from these fires, Melissa. So already prior to these fires, I mean, there were the 2017, 2018 fires, and that really put this whole area into an insurance crisis of sorts in terms of, you know, insurers pulling out, facing huge losses. How does this sort of, I mean, if all the insurers are ultimately on the hook for Fair Plan, I mean, even if they pulled out, then how do analysts sort of handicap that?

21:16I think, number one, the state has to handicap it first because, again, all of these people are coming in. What the state has said is we recognize that there's a problem. They have not approved the rate hikes that the insurers have asked for. And this has been years in the making. So, number one, that has started to change. But in return for those rate hikes, the state is expecting these insurers to agree to accept like 85 percent of the policies or the homeowners that apply for wildfire coverage. They're doing a tit for tat in this case. They've met the metrics for this sustainable insurance plan that they've set up for the state.

21:49by the end of 2024. The question is, is it going to throw the plans to sort of bring this market into a healthier scenario? Will this fire now disrupt all of that and send these insurers running, which then puts California back at the beginning again of trying to figure out a crisis? Right. Contessa, thank you. Contessa Brewer, terrible situation, terrible for the people of California. How do we think about what is going on there? From this, this insurance part? The economic loss. The economic loss, but also I think about, so as she said, many companies had already pulled out and wouldn't insure.