Welcome to trade wars
QRA this week, jobs report, earnings
Quick summary:
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Last week started with Nvidia and other tech stocks grappling with the DeepSeek disturbance, and swiftly moved to broader market instability due to unexpected tariff announcements from the Trump administration on Canada, Mexico, and China. The same “tariff trade” continued on Monday and this topsy-turvy environment is likely to stay.
As bond yields dipped from 4.8% to 4.5%, the market reacted to fiscal uncertainties and awaits the Treasury’s quarterly refinancing announcement in light of a $1.9 trillion budget deficit. The info that came out on Monday was as we expected (announced in the Saturday newsletter): issuance stays the same, at $850bn. The deficit is still high, so the key thing to watch on Wednesday is Bessent’s plan for the deficit in the future.
Spotlight this week, in addition to the QRA, is on the January employment report, a couple of big earnings, and forthcoming speeches by Federal Reserve officials.
The competition
After last week's market shake-up from the DeepSeek disturbance in tech stocks, we're heading into a week where we'll see important updates like the January employment report and reactions to recent tariff news. It's a good time to adjust our strategies. Let’s stay focused and work on moving up the leaderboard.
Keep your strategies sharp and your eyes on the top!
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Last week’s performance
The week began with the DeepSeek disturbance impacting tech stocks, notably Nvidia and semiconductors, setting a nervous tone. The situation escalated with the Trump administration's unexpected tariffs on Canada, Mexico, and China announced late Thursday and confirmed on Friday, causing markets to plummet then briefly rebound. However, these gains were short-lived as markets dipped again on Friday, despite a better-than-expected PCE inflation report suggesting milder inflation than anticipated. Then over the weekend, Trump made his pledge real, but by Monday both Mexico and Canada caved to his demands, signed a deal, and tariffs were postponed. China, however, retaliated. For now.
But this is the short term focus from now on, folks. How will the tariff trades impact markets, are they real or just Trump’s bargaining chip, can we really expect a trade war? China and the EU are next in line to test all these questions.
This week, the focus is also on the composition of financing in the QRA (short duration vs long duration bonds), and how new Treasury Secretary Bessent will handle the ballooning $1.9tn budget deficit (6% of US GDP).
New Treasury Secretary Bessent will most likely take this opportunity to announce his policy intentions to the bond market. Debt and deficits are large, and there are loads of bonds to refinance.
There are two possible outcomes:
a) no change to auction sizes, less talk about now, more about what is going to be done in the future in terms of the structure of offered treasuries (low probability of a major market impact this week). Much more likely outcome for the first QRA.
b) Increase in auction sizes (to finance humongous debt and increase the gap if sizable tax cuts are the real thing in the first year of the 2nd Trump term). That will send bonds sliding and yields up closer to 5%.
The jobs report on Friday will be about what the Fed will do in light of (un)employment numbers in January, but later in the year. The Fed pause, for now, is almost a lock. Earnings are not amazingly important but could shed a bit of light on economic activity, momentum of the market, liquidity, etc. We get GOOGL, AMD, Pfizer, Spotify, PayPal (today), AMZN and Lilly (Thursday), Uber, Novo Nordisk, Disney, Toyota, and MSTR (Wed), etc.
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The title is great... I really laughed out loud ... hehehehe