US short yields slide, Nvidia in view

It's hard for markets to see much beyond tonight's earnings from AI-lodestar Nvidia, but political tensions surrounding the Federal Reserve have seen two-year Treasury yields plunge to near four-month lows and the 2-30 year yield curve steepen more. Emboldened by brisk demand at Tuesday's auction, the intensifying political pressure on the Fed to slash interest rates and now the possibility of another Trump appointee replacing Lisa Cook on the board have sent two-year Treasury yields sliding to their lowest since May 1 at 3.65% – even as 30-year yields remain above 4.90%. 

Futures still only see an 80% chance of a cut in the 4.25%-4.50% policy rate in September, but the betting on where rates will be in a year's time has dropped 25 basis points over the past month to as low as 2.92%. The standoff between the Fed and the White House over Cook's position remains uncertain as she seems set to seek a legal injunction to stay in position, presumably for the September policy meeting, while courts rule on President Donald Trump's ability to remove her. Most investors see Fed independence at the heart of the row and, as it stands, the market's main move is to steepen the yield curve to its widest in more than three years to account for early easing, but also rising inflation expectations on a view those cuts may not be appropriate. 

Aside from the Nvidia vigil, which options markets suggest could see a 6% swing either way in its share price and up to 1% swing in the S&P 500, Wall Street stocks riffed off the mounting rate cut speculation and ended higher on Tuesday. Futures were flatter ahead of today's bell. The dollar was firmer despite the drop in 2-year yields, but its moves have been hampered by the euro's reaction to a flare-up in French political tensions this week – with the government there possibly collapsing again in a budget confidence vote set for September 8. A heavy sell-off in French stocks and bonds on Tuesday calmed somewhat today, with France's 30-year bond yield pausing close to new 14-year highs. 

India's rupee fell close to the year's lows as Trump's doubling of tariffs on imports from India to as much as 50% took effect as scheduled on Wednesday, delivering a serious blow to ties between the two countries. China's stocks underperformed generally positive world stock markets after news China's industrial profits fell for a third consecutive month in July, with businesses struggling in the face of subdued demand and persistent factory-gate deflation despite policy measures to help shore up the economic recovery. 

Today's column looks at the AA+ U.S. sovereign credit rating, both how tariff revenues are supporting the stable outlook and also what's behind the market's more skeptical view of U.S. creditworthiness.  

Today's Market Minute 

U.S. President Donald Trump's doubling of tariffs on goods from India to as much as 50% took effect as scheduled on Wednesday, escalating tensions between the world's two largest democracies and strategic partners. 

Nvidia's business in China will be the focus of investors when the AI chipmaker reports earnings on Wednesday, following an unusual deal with the Trump administration and Beijing's subsequent efforts to stall imports. 

Federal Reserve Governor Lisa Cook will file a lawsuit to prevent President Donald Trump from firing her, a lawyer for the embattled central bank official said on Tuesday, kicking off what could be a protracted legal fight over the White House's effort to shape U.S. monetary policy. 

The increased U.S. tariffs on Indian goods are a textbook example of a lose-lose situation for both countries, but, writes ROI columnist Clyde Russell, they are perversely a win for the intended target, Russia. 

Questions are arising about the hype surrounding artificial intelligence. Nvidia's quarterly results this week could therefore potentially be explosive – not just for the company's shares or the tech sector, but for all of Wall Street, argues ROI markets columnist Jamie McGeever.  

Chart of the Day 

The Conference Board's monthly survey of U.S. consumers showed perceptions of the ability to find a job were at their weakest in more than four years in August, reinforcing the recent Fed dovishness about the unfolding state of the labor market. The survey showed the share of consumers who viewed jobs as "hard to get" jumped to 20.0% in August, the highest since February 2021, from 18.9% in July. 

The proportion saying jobs were "plentiful" eased slightly. That pushed the survey's so-called labor market differential down to 9.7 from 11.0 in July. And that measure tends to correlate to the unemployment rate in the Labor Department's monthly employment report. The headache for the Fed of course is that inflation expectations are rising in tandem – consumers' average 12-month inflation view rose to 6.2% after easing for three straight months.  

Today's Events to Watch 

- Richmond Federal Reserve President Thomas Barkin speaks. 

- U.S. corporate earnings: Nvidia, HP, Agilent, CrowdStrike, NetApp, Williams-Sonoma, JM Smucker. 

- U.S. Treasury sells $70 billion of 5-year notes, $28 billion of 2-year floating rate notes. 

- French President Emmanuel Macron, German Chancellor Friedrich Merz and Polish Prime Minister Donald Tusk visit Moldova.