“Patience To See, Not To Guess”

By Benjamin Picton, Rabobank Senior Macro Strategist

Patience To See

Tech names drove the NASDAQ and S&P500 to further gains yesterday, while the Dow Jones fell for a second-straight session. Semiconductors performed especially well as fund managers caught underweight high-beta US megacaps continued a buying spree that was sparked by a 90-day tariff reduction between the US and China announced on Monday. Nvidia posted a 4.16% gain and AMD was up 4.68% as both companies inked deals with Saudi Arabia to sell more chips for AI applications. European stocks underperformed with most major indexes closing lower, and the Nikkei fell as funds flowed back into Hong Kong’s Hang Seng index and China’s CSI300.

While stocks were rising, US 10-year bond yields poked back above the psychological 4.50% level to close the day up 6bps at 4.54%. 30-year Treasury yields closed half a bip below the intraday highs at 4.98%, which means that yields on both the 10-year and the 30-year are now trading above the levels that were in effect on April 9th when the Trump administration apparently cried “uncle!” in response to bond market pressure and kicked the implementation of reciprocal tariffs into the long grass for 90 days.

Perhaps we are about to find out whether it really was rising bond yields that forced the about face on those reciprocal tariffs, or if Scott Bessent has some other rabbit to pull out of his hat to force long yields lower. Rising bond yields is a problem for America’s chief bond salesman who has trillions of Dollars’ worth of debt to refinance in the months ahead. With the Fed still engaged in quantitative tightening, and enormous budget deficits still being run (despite DOGE), Bessent is going to have to work hard to sniff out other bids, and US homebuyers better hope that he can convince offshore investors that Treasuries yielding 4.5-5% are just too juicy to last. One wonders how durable the rally in long-duration tech can be while yields on long bonds are making new highs.

Fed Speakers yesterday offered no help to the Treasury Secretary by giving the impression that there is no rush to cut the Fed Funds rate any further. Mary Daly said that the Fed had to have “patience to see, not to guess”, which seems to discount the possibility of any kind of pre-emptive policy action. Daly also said that if you take a step back from all the tariff uncertainty the underlying economy is experiencing solid growth, with a strong labor market and declining inflation. That assessment might be a little bit like saying that the Dinosaurs were in really good shape if you ignore the uncertain effects of the approaching meteor. 

In the land of hard data, the US economy shrank in Q1 because of a surge in imports that could be replicated in Q2 as the 90-day reprieve on China tariffs encourages importers and retailers to “reload the gun” on goods inventories. Two consecutive quarters of negative growth is the definition of a recession, but get ready for plenty of commentators to suggest that this one doesn’t really count (it wouldn’t be the first time!).

Meanwhile, President Trump continues his dealmaking tour of the Middle East where Qatar has now reportedly agreed to purchase as many as 210 new jets from Boeing. This comes off the back of the semiconductor, energy and military hardware deals signed in Saudi Arabia, Trump’s announcement that sanctions on Syria will be lifted and his meeting with the new Syrian President, who he urged to normalize relations with Israel.

It’s worth pointing out that while the markets were mostly focused on deals to sell more US chips and US energy, there were also announcements of new sanctions on companies facilitating the sale of Iranian oil to China and a new guidance issued by the Commerce Department that the use of Huawei’s Ascend AI chips “anywhere in the world” constituted a violation of US export controls. 

As this Daily noted yesterday, 90-day tariff reduction notwithstanding, what is happening in the Middle East and with trade more broadly should serve as a signal that geopolitical competition between the United States and China isn’t going away.