Stocks Flat as Investors Protect Gains Ahead of Nvidia Earnings

It’s not clear what took the market down in the last few minutes yesterday. All the indexes went down together, although there was a downward slope from lunchtime on. It may be that short sellers forced to cover on Friday’s huge rally were putting positions back on. If so, it’s not necessarily a reflection that there’s a major correction brewing, but rather a strategy to protect gains with stocks at all-time highs.

There is also positioning taking place in front of NVIDIA earnings tomorrow, where the downside of any disappointments is probably greater than the upside of an even stronger outlook that is already priced into the world’s most valuable stock. 

The story of the day is Trump firing Fed governor Lisa Cook over her purchasing and financing two primary residences at the same time in order to get cheaper owner-occupied loan rates on both. Cook has refused to resign, and it does seem to be a case of declaring someone guilty before their day in court.

More importantly, it is seen as an attempt by Trump to place more of his own selections at the Fed, which people say threatens the independence of the Fed, a somewhat murky concept inasmuch as all the senior members are selected by politicians for their terms. That said, Trump is certainly entitled to have his own opinion about what the Fed should be doing about interest rates, and clearly, with $37 trillion in US Treasury debt, lower rates would save a huge amount on refinancing costs. 

Stocks are basically flat after the first hour of trading, with the exception of the Russell 2000, which has outperformed since the dovish Powell speech, as smaller companies will benefit more from the lower interest rates anticipated. The VIX was as high as 15.75 overnight but has retreated back to yesterday’s close of 14.79.

Only 3 sectors are in the green this morning: tech, healthcare, and industrials, with energy and consumer staples the weakest, both down 0.6%. Momentum and growth names are showing strength going into the NVIDIA print. 

Interest rates are steepening today, with the US 2-year down 3bps to 3.70%, the 10-year flat at 4.28%, and the 20-year +4bps to 4.90% and the 30-year +5bps to 4.94%. A positive sloping yield curve is normal (longer rates should pay more for the added duration risk), though some analysts feel it also reflects the rapidly growing debt load, where the US Treasury debt has blown by $37 trillion and is rising much faster than tariff income is growing.

In other events, after the US government took a 10% interest in Intel (INTC) in exchange for the Chip Act funds received, we’re now hearing that the Department of Defense is contemplating taking equity interests in defense contractors. This is being explained as part of the planned Sovereign Wealth Fund by the administration, but some pundits are calling it State Capitalism.

The market continues to trade sideways after the initial move. The market is waiting for the NVIDIA numbers.

Next week’s labor statistics, if continued weakness is posted, will firm up a September Fed cut; if even weaker, may lead to calls for a 50bps cut. Momentum remains positive.