Yields "Going Up For Right Reason," AI Leads Markets at Breadth's Expense

SPEAKER_1 (0:00)

Welcome back to Morning Trade Live. It's time now for the big picture. Let's welcome in the team from Charles Schwab, Nate Peterson, Director of Derivatives Analysis, joining us right now. Nate, the S&P Global PMI doesn't typically move the needle, but I was just reading through some of the commentary that firms' input costs have jumped to the steepest rate in four years, which will add further to the upward pressure on selling prices and inflation in the coming months. Uh-oh, we saw the 10-year shoot up we're north of 5% again. I mean, how are you thinking about this?

Nathan Peterson (0:35)

Yeah, good morning, Sam. Yeah, I read that too. Pretty impressive. And on the inflationary side, wage pressure has not been an issue, but in that report, they suggested there was a bottleneck on labor and that perhaps wage pressures could be coming into the equation. So I'd say this, you know, yields are going up for the right reason. Atlanta Fed, you know, 5.1%, look at retail sales, look at the non-farm payrolls report. Yeah, this is from August from these, you know, boasts on the manufacturing and services, but both were very strong. Now, what's the deal with equities? Well, of course, when you're breaking above this, you know, I'm looking at the 10 year too, 5.05%.

It's not that big of a deal right now, but you know, in technical analysis, when you're running up to a level, price is king, when you run up to a level, and that has been 5% for the 10 year, and when buyers step in there multiple times, then if it breaks through there meaningfully, so we can't just take this one day as an example, we have to wait a couple of days to see, this thing could be back below 5% by Friday.

But it could mean something if you get some velocity on this break, that something fundamentally is changing in terms of the trajectory of yields and are risk assets appropriately apprised for that potential trajectory. So that's what the algos are reacting to right now.

SPEAKER_1 (2:01)

Let's talk about stocks as you mentioned. Obviously, the NASDAQ has had a nice couple of days. We saw some all-time highs there. No doubt Meta was a big contributor to that and everything around it, with the buzz around what that could mean for CPU demand as well. From a technical standpoint, obviously, we punched through some key levels here, I mean 7700 on the S&P, 30,000 on the NDX as well.

What does this mean? I mean, what have you made of that? Particularly, as we've seen that momentum rebound and the Mag7, which had been the underperformer for most of the summers, you and I had been talking about now to outperforming once again, and really re-establishing that market leadership.

Nathan Peterson (2:44)

Yeah, no doubt.

If you look at market breadth, tech is back at the expense of deterioration in other sectors. Financials got hit yesterday, staples, etc. But Sam, the most significant thing, this is all about AI infrastructure build out, and this is what has been supporting these 20 percent plus EPS growth quarter estimates that we're seeing.

It's so important to the bull thesis. So what's the big deal? Well, let's go back to Nvidia, August 22nd. Hey, we might be raising prices next year.

Then we go to Hochtan last week from Intel CEO. Memory prices are up five to seven X. We get Micron next week. And then on Monday, AMD, there was a report, I don't know if AMD confirmed, that they may need to be raising prices by 10 percent. What is that, what are those signals telling you about where the demand, the state of the demand for the AI trade is? And it's obvious that if you're getting price increases, yes, there's price cuts on the in-user compute prices, but the demand is still exceptionally healthy if you're able to raise prices, which just goes back to the thesis where, okay, let's go back to AI infrastructure, because that appears to be where the thesis is sound, even if we're going to have higher rates, higher oil. Yes, I know tech is a long-duration asset. If rates go too high, there's going to be some volatility in tech. I get it. But the firm break above the 50-day SMA in the Sox on Monday, we're getting a bit of a pullback. This would be called a throwback in technical land, which would be healthy, meaning you retest the 50-day SMA. We'll see what happens. But to me, that's the most significant technical breakthrough. This AI infrastructure may be leading the bulls even higher here in the coming weeks, provided yields behave.