The Hidden Danger Lurking in the Rates Market, and the Tit-For-Tat Between the U.S. and China 5/7/23

0:01Right now in fast heating up will the surge in the 10 year to almost 4 % be a warning sign that this red hot summer rally is about to get cooled off big time the data and the data and the debate. coming up. Plus, throwing in the towel, Goldman Sachs finally ditching its sell rating on Netflix. This after the stock has rallied close to 130 percent since Goldman made that call. The next move for all the streamers straight ahead. And later, a buzzkill on Coinbase, China's new battle over rare earth metals and Meta's new social media brawl with Elon Musk and Twitter. I'm Melissa Lee. This is Fast Money.

0:30We're live at the Nasdaq Market site on the desk tonight. Tim Seymour, Karen Feinerman, Dan Nathan and Bono and Eisen. We start off with what might be a major warning sign for the markets. A yield on the 10-year Treasury touching its highest level since the collapse of Silicon Valley Bank. Rates ending the day, just a few basis points shy of 4%. The two-year also rising, getting within a stone's throw of 5%. The yield had fallen below 3.6 % in late March. So does the steady climb higher in rates threaten the market's recent run? And will it put a cap on how much higher the S &P 500 can go in the second half?

1:03Tim, what do you think? Well, you know, if you're measuring stocks and you're doing your valuation, you have a discount rate, that's pretty mechanical. In other words, higher rates mean lower equity prices. That's just what analysts do for a living. If you think about a world where we have a trillion dollars of floating rate debt out there, so maybe that's the shorter end. But either way, if you think about the impact on earnings from higher rates from corporate America, operating margins, etc., I just think the dynamic with how rates are playing out here is a function of where we've seen the job market remain very resilient.

1:33I realize we always poo-poo the GDP number, But when you saw that GDP number that was revised, the consumption data inherent in that number really tells you that rates maybe could be moving higher. And again, we're talking about three, three ninety four percent on a 10 year, which isn't runaway. And in fact, only get you back to where we were. The fact that rates are taking back from where they were pre SVB. And I would take it more to the two year note, which is now closer to that March 8th high at five oh six close is something that really gives you some sense that at least some normalcy has gotten back into the banking sector.

2:05I actually think it's actually relatively good news for now, even though, you know, we're going to spend a lot of time talking about Fed minutes and what they admit. I mean, the level I was thinking about this because there was a technical analyst that I spoke to on Swalk on the Street earlier today, and he said 4 percent. That is if we go above 4 percent, that's going to provide real resistance to the S &P 500. Four percent seem to be the magic. Maybe. But I guess what's different this time, and this is not me getting bullish by any means, if you just look at the Fed's balance sheet and look what happened since March.

2:30The S &P 500 has rallied like 15 plus percent since the lows. What did they do? They injected a whole bunch of liquidity, right? So the Fed's balance sheet was$9 trillion, okay, up from$4 trillion pre-pandemic. And then it came down to$8.3 trillion, went up to$8.7 trillion in those few months following the SVB collapse. And here we are. We're back at that level. But the fact that you have rates moving back to that$4 trillion and$5 trillion level, I mean, the liquidity is still there. You know what I mean? And when you think about some of the biggest companies that really make up the market, that make up earnings growth, that don't really care much about interest rates.

3:05I mean, in my opinion, they've done well in a higher inflationary environment. So to me, to put your finger on that, just because we're at those round numbers once again, I guess I would focus on more what that 210 spread is inverted as long as it has been, what that means over time. because as long as the Fed's balance sheet stays up here and doesn't materially work lower, and we know that they're going to go back to their playbook, if there's any other credit issues that happened into the market as basically, you know, like the round two of what we dealt with the regional banking crisis, then stocks remain bid because money went immediately in March to those largest numbers.

3:40Then they got hooked up into this AI thing, which is probably the one thing that a lot of bulls right here feel is recession-proof, it's inflation-proof, it's everything-proof. Yeah, I mean, I think that's a good point. You know, it's hard to say 4 % is that particular number. I will say with higher rates, clearly it makes it for a much more challenging stock market. And what I do think will happen is we won't see the breadth that the bulls are calling for. You will see a retrenchment into those top five or seven names where people think have a high margin of safety, don't need to refinance, cash flow positive, kind of, you know, balance sheets that look like war chests.

4:16I mean, that's really what I think will happen. And now the question is, will you see enough value expansion within just that sub pocket in order to drive the market higher? And that's where I really think the challenge is. Without the breath, I think it makes it tough to call for a new high in the S &P. I think that's a really good point in terms of the five-year on the two-year. That's going to make it difficult for, like, the Russell 2000, for instance, to join in on this fund. We've seen a broadening in recent weeks. But if higher yields really put a crimp on in some part of the market, it will be on the parts that will have to go to the market to fund to fund.

4:49Yeah, definitely harder. I mean, you're looking at rates near zero. It's amazing some of the bonds that you find out there that you see. Oh, my God, a zero with a conversion 300 percent higher than where the stock is. There's a number of those. It's I mean, they all did a great job. The Fed worked what they were trying to do. But I feel like we're sort of in a little bit of a vacuum of news in that, you know, next week we will start to see bank earnings. And I think that that will really, banks, not only do we want to know how the banks are doing, which I think probably pretty well, but we also want to know what do they see in the economy?

5:20What are they seeing from the consumer? Are they starting to see any M &A pickup? So I think that I'm a little more optimistic that we'll see some good things coming out of earnings. I know the bar is getting higher, certainly on anything AI. The bar is stratospheric, but I don't know. I'm optimistic. We'll also get jobs on Friday. That's what I think. I think we have jobs Friday. We have a CPI number the following Wednesday. The headline number on CPI is going to be below five. And so and if you I'm sorry, the core CPI could be below five. You could you know, I'm seeing consensus of the street around four point nine headline on CPI.

5:59really, if you look at the year over year, is going to be kind of an exciting number, even though that's not the number we're looking at. But we're waiting for payrolls to kind of reinforce that some of the tightening is putting an impact on what companies are doing. So far, so good. But again, I go back to the market that we have, and we're talking about AI and what it did to NVIDIA and what it did to all these other tech companies, really, not even just the ones that were in the middle of AI. And I look at the Semiconductors Index, which hasn't made a relative new high against the S &P since May 25th, the day that NVIDIA reported this.

6:33And you had this spike high. So I continue to think you have to at least watch this in terms of the markets direction. I'm not saying you're falling out of bed, but if you do that ratio of essentially the SMH divided by essentially the SPY, you're at this ratio of about 0.35, where we keep failing at. And I think you have to watch that. All right, let's get to the latest commentary out of the Federal Reserve. The central bank noting in the minutes that most members anticipate more rate hikes ahead. CNBC's Steve Leisman has more on that. We knew that, Steve. So what else do we find out? Hey, well, New York Fed's President John Williams just got done with some remarks.

7:07He says the placing is still too high, but he does see some progress. He says he's somewhat surprised by the resilience of the housing market. There were some comments about that in the minutes as well, maybe the housing market bottoming out. He said he supported the decision to pause in June because slowing the pace of rate increases makes sense as the Fed gathers more data and figures out the lagged effects of monetary policy, rate hikes that it's already done. He supports a meeting-by-meeting decision on rates, but don't get too happy because he goes on to say the Fed's projections for rates show, we don't think we are done.

7:36That was reflected in the minutes to the Fed's June meeting, came out at 2 o 'clock this afternoon, where almost all thought future rate hikes were appropriate, even as they voted unanimously at the time to pause. But the minutes raised questions about that unanimity because some said they wanted to hike 25 basis points at the last meeting. In the end, the pause prevailed, with most saying the Fed would benefit from more time, as William said, to assess the lagged effects of rate hikes. But the Fed wasn't necessarily happy with the sense of the economy. If you look at what their problems were with the economy, they said inflation was too high, risk to the upside, labor market was very tight, consumer spending and GDP were both resilient, and housing may indeed have bottomed.

8:16I'm looking at the Fed futures contracts right now, where the Fed is or where the market thinks the Fed is. Eighty five percent probability of a rate hike coming in July, but only about thirty five or so when it comes to that next hike in November. So the market's on board right now with the issue. There's the chart right there. Thirty five for the November rate hike. Markets on board with that first hike. Second hike they're kind of flirting with, but there's time to figure that out. And obviously some data dependence. I think a lot of members of the Fed want to do that second hike, but they'll be guided by the data.

8:49Melissa? I'm going to ask you the same question that I asked you this morning. I mean, if the Fed really wants to get to 2 percent and they're noting all these different things about the economy that remain strong, it seems like there's a long road ahead. It's not just another 25 basis points and poof, you're done. I mean, housing may have bottomed. That's great. But the housing market really hasn't taken much of a stumble if you look at the recent data and how home builders are doing. No, that's right. I mean, even the current level of home building at 1.3, 1.4 million, we've seen much lower rates than that when there's been a real decline in housing.

9:22You're right, Melissa, the Fed has a problem with two particular areas, housing and autos, both of which should be extremely rate sensitive. But autos, I think Phil Lebeau has been reporting fairly robust annual sales for the most recent months. So that's a problem because there's some pent up demand. And as you know, a lot of pent up demand in housing. So the Fed's going to have to lean harder in two different ways. One is it could lean harder by hiking rates. The second is it'll lean harder by staying at a high rate while the inflation rate falls. Melissa, what will that mean? It'll mean the real rate, the real Fed funds rate will actually become at least as restrictive or more restrictive.

9:58If Tim is right, you get this decline in core CPI coming up or just in regular CPI coming up. Well, then relatively, the Fed is tighter because the real rate minus inflation is higher. All right, Steve, thanks. Go catch your flight. Thank you. Steve Leisman. Thank you. It's always good to get Steve's input. Is he in one of those little CNBC newspaper places? Oh, that's a good question. Those are great places. Except they don't have fast money prominently featured. I know. I don't know. We'll get on that right away. It's a high priority. In terms of, I mean, let's say they do 25 more basis points and they stay there for a long time.

10:35Is that going to produce a restrictive environment that the Fed needs? I guess it's that real rate, Right. It just depends how quickly, you know, inflation is coming down or whether it reinserts itself. And those are some of the concerns that you're seeing over in Europe. I, you know, I go back to, you know, when you just said you're optimistic. It's interesting, you know, from here. And I know you've been optimistic this year and you were optimistic at the lows last year from here. And what does it take? I was optimistic at the highs also. No, no, no. But you were, you know, more, you know, pounding the table down.

11:02But my point is, you'd be optimistic that we're going to avoid a recession, that almost every economist nine months ago was pretty certain was going to happen at some point this year. I think they're all still expecting it. No, it's just weird. I mean, it's just really, when you look at the home sales and the way they reaccelerated on a sequential basis, up 12 percent month over month, and those are new home sales. And you look at what the stock market is doing despite what's going on with interest rates and despite the Fed speaking and the hawkish pause and everything like that. it just seems like we're getting to a place where we have all been over the last 20 or so years at different times where things are kind of off the rails just from a risk asset value standpoint.

11:38And that's where things, I think, get really dangerous. We're very rational. People like you remain optimistic in the face of something that really shouldn't be the case. If you think about how quickly rates have gone up, what the Fed is saying and what they're still trying to do. Response? Response from a rational person. Hello. No, I think that But they've been OK. It's been a while since they've started. It's already 15 months. Right. And they were telling us, telling us, telling us over and over again, we are going to raise rates. We're going to be aggressive. There was no doubt. So we've had a lot of time.

12:10And, you know, I hear a lot about, well, we haven't even seen the full lag effects. I don't know. I feel like it's starting to be enough time that those lag effects would be here. The housing thing, it's a very unique situation with people who have a home and a mortgage at, you know, three ish percent. who can't move and don't want to move. And the supply-demand dynamic from the housing crisis is still so out of whack. Great for the home builders, but not so great for people looking to find an affordable home. But I also think companies are just run better. And I think that also the market's not a monolith.

12:43There are areas that have sort of been left behind. And then there's obviously AI, which is way out ahead. But I don't know. I still remain optimistic. It's just my way. Just sitting across from you makes me optimistic. What can I say? The one place that we really are getting consumer credit data that's breaking down. I mean, we're seeing we're seeing both in aggregate levels of where it is outstanding in terms of debt service ratios, percentage of disposable income to debt. I mean, so, you know, at some point that feeds through to corporates. And that's something we should all be watching. I also just, you know, back to that 10 year.

13:14If you think about where we were before we even knew COVID could could exist in this world. We're in a world where equities were always about Tina. There was no alternative. And so, you know, that's a dynamic that I think we were talking about in 2018 as rates went from kind of 150 up to 280 on my charts here before we started to fall apart. We have to consider equities and their earnings yield and the alternatives investors have in yield product than what they had back then. For more on what all this could signal for markets and the economy in the second half, let's bring in CNBC contributor Peter Bookvar.

13:46He is Weekly Financial Group's chief investment officer. Peter, great to see you. Did you learn much? You said nothing new came out of the minutes. Nothing new, but anybody looking through the minutes to try to find any hint of dovishness didn't really find it. And I think that's why the rate hike odds for July didn't really change at around 82 percent. Now, can that change with Friday's payroll number or next week's CPI? Maybe, but it seems that the Fed is at least intent on going one more time. I say one more time because I think this is one more time too much. and I find it hard to believe that they're going to go past this because of the restricted nature of where we are today.

14:26You know, Karen was making the point just now, Peter, that, you know, it's been 15 months since the first rate hike and shouldn't we start to see some of the lag effects at this point? And I'm wondering, you know, based on what, how do you think those lag effects are going to manifest in the economy if we're not really seeing so much right now? What are you expecting if you think the Fed is going too far already? It's happening every day, but it's not making it on the front page of The Wall Street Journal. It's happening to the person whose adjustable rate mortgage just came due. It's happening to the business that has a loan coming due or has a floating rate piece of paper that is resetting.

15:02It's happening every single day. Somebody's seeing a dramatically, sharply higher cost of capital because every day somebody's loan is coming due, whether it's a business or a household. So this is sort of a silent killer, in my opinion, to economic growth that we don't see headline nature-wise. But in a cumulative perspective, it's happening over the next couple of quarters, over the next couple of years, if rates stay at these high levels for a while. More money is being allocated to interest expense. Bankruptcies are picking up. Commercial real estate projects we know are handing back the keys.

15:35This is just, like I said, a silent impact on the economy that is not front page news, but it's happening every single day. And somebody is getting caught with too much debt or an unlevered or I should say an unbalanced balance sheet. Peter, thanks so much for your time. Bono here. So there seems to be a lot of attention paid to the absolute level of rates. But one thing that the Fed officials were unanimous about was the desire to shrink balance sheet. Would you mind speaking a bit about that and the effects that perhaps are being overlooked on that aspect? Well, I agree. And I know Dan was talking about it earlier.

16:10Probably on Friday, we'll see the balance sheet of the Fed get finally back below where it was right before SVB collapsed. So I think the balance sheet shrinkage is going to be now more notable from here from a contractionary standpoint. And we know QE was meant to lift asset prices. QT does the reverse, even though it's sort of been put to the side because of these other liquidity things with the RRP, for example, and the TGA and so forth. But I think from here on out, from a liquidity standpoint, it begins to matter. Now, this is also sort of behind the scenes. But I think it's while the Fed may be done about raising interest rates, whether they go one more time or not, they're going to rely on higher for longer.

16:53And they're going to rely on the continued shrinkage of that balance sheet. Now, where the balance sheet is going to go and where they're targeting, we don't know eventually where it settles out at. But I know in the Fed's mind right now, they hope to shrink the balance sheet by another one to two trillion dollars from here. Peter, always good to see you. Thank you. Thanks, Melissa. Peter Bokvar, Bleakley. I think it's an interesting point. If you had an adjustable rate mortgage, let's say it was 5-1. I mean, what was your rate and what is it jumping to? The differential is enormous at this point.

17:22Yeah, throw the student loan thing on there. I mean, listen, there's a lot of things. But listen, you know, optimistic. You have to be. Markets go up over time, right? And just in this sort of environment with these sorts of dynamics, and, you know, it's really hard to see how we can get much further from here uncorrected at some point. And when you think about just the NASDAQ in particular, and you think of the concentration of those names, I know that it sounds like we're beating a dead horse. You know, there's been all this focus on the broadening out of the markets. But when you put a bunch of the sectors that are starting to participate, they really add up to like, you know, an Apple and a Microsoft, you know what I mean, combined.

17:54So it's just like so many, so much of the optimism seems to be in 10 stocks. And that just seems to be a dangerous situation. Well, again, the most notable line today from those Fed minutes was it does not appear the economy is is inflation's on a path to return to the committee's 2 percent objective over time. They don't think that they're even close here. That means rates are staying where they are there during this period. And with that expectation and Fed funds have priced us in. By the way, you look out one year, there's we're exactly where we are right now in Fed funds. So the market's kind of saying we kind of we kind of believe the Fed.

18:26But but look at the chart on FedEx. Look at the chart on airlines. I mean, these are these are industrials that are telling you something. Look at what's going on in Japan, who's really been welcoming any signs of inflation. So there are places to invest in this market. I think Japan's going to overshoot to the upside. We spent a lot of time talking international. There are some places that actually are doing well in this environment. And I think that's where people need to be. I think staples look expensive. I think, you know, forget mega cap tech. But I think there are places within health care that have been very beaten up.

18:56I think this is that opportunity here. All right. Coming up, the streaming wars rage on. Analysts binging on Netflix as Amazon's big spending comes into focus. So where should you be in this trade? We'll debate that next. Plus, crypto crash by one firm is calling for a big drop in Coinbase shares. And why the recent Bitcoin boom didn't help. Don't go anywhere. Fast Money's back in two.

19:22Welcome back to Fast Money. Netflix on a binge day, hitting its highest level since February 2022 after a pre-earnings upgrade from Goldman Sachs. The bank raising the stock to a neutral from a sell and hiked its price target to$400 from$230, setting prolonged post-pandemic momentum fueled by its password-sharing clampdown. Still, the target's about 10 % below where Netflix closed the day. We're all scratching our heads here. Meantime, Amazon CEO Andy Jassy is reportedly reevaluating spending on its own original programming as part of its company-wide cost-cutting program. Tim, you've been in this.

19:57Yeah. First of all, it's tough being an analyst in anything. It's tough doing what we do. We get things wrong all the time. That$2.30 probably went when the stock was, you know, at$2.20, you know. So anyway, but the argument for Netflix, especially around content, is that they're in a pretty good position here, not just because of a strike that's going on in Hollywood that may be expanding, may not be, but because of the international presence that's always been one of the reasons why Netflix actually was the stock you wanted to own, where they had their growth, is where they don't run into this.

20:30Their content machine, which has also proven to be maybe more efficient than the major studios, I think it just gets down to they're finally getting rewarded. and people can see this is all accretive, what's going on in password sharing. And also that their lower price ad tier has been wildly successful and even changing how people are viewing without it being cannibalistic. So if you look at the stock, you know, back up to that 450 level, that's the level after the Q122 disaster where it traded down. It rallied back up to there. And I think there's some resistance here. But again, that's where the stock has, I think, run into some trouble.

21:03But I think it builds a base there, too. Part of this call was a competition. I think the word is more muted. And it's Amazon News, this report that it's scrutinizing what it's spending on Amazon Studios really gets to that point, that everybody is looking at how much scrutinizing their budgets when it comes to spend, which is great for Netflix. It is great for Netflix. Netflix is in financially the best position by far. Tim, talking about that point, I mean, that was the beginning of 2022. Money was still free. And you had all these streamers coming in. And they were putting up big numbers, right?

21:31Disney was seen as very successful. This would be great for Disney. And you had all these new competitors jumping in. that game is over. Money is no longer free for sure. And so Netflix is just it's just the winner. I just keep waiting to see who gets taken out, either via merger or they just throw that throw in the towel because it's too expensive. Yeah. And hindsight is always 20, 20. But that move away from subscriber growth might seems to be very prescient. Essentially, if you're growing at what you're growing, but at what cost and for them to say we're strategically going to shift away from that in addition to the ad tier and cracking down on passwords, I think, you know, sets up pretty nicely.