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Stocks fell sharply on Friday as rates broke out globally. The move higher began in Japan, where PPI rose 2.3% month over month versus estimates of 0.8%, while the year-over-year rate surged to 4.9% against expectations of 3%. That sent the 30-year JGB yield soaring 16 basis points to 4.08%.
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This caused the spread between the US 30-year Treasury yield and the 30-year JGB yield to narrow to just 1.04%, pushing it back toward the lower end of its historical range dating to 2007. Unless that spread compresses further — which seems unlikely — the US 30-year yield will likely move largely in tandem with the 30-year JGB yield going forward.
The German 10-year yield also reached a new cycle high on Friday, marking its highest level since 2011.
In fact, markets are now pricing in between two and three rate hikes this year from nearly every major central bank outside the US. Meanwhile, at least for now, the market is also pricing in the possibility of a Fed rate hike before year-end.
This also caused the spread between Italian and German 10-year yields to widen back to 77 basis points, which remains historically very tight. More importantly, though, the spread has been consolidating for some time and now appears to be nearing a potential breakout of its own. A break out in this would be news for all credit spreads.
As a result, the dollar broke out of a bull flag on Friday and could now be on its way back toward the 100 to 100.5 range.
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A breakout in credit spreads, or a breakdown in the HYG ETF, would likely be devastating for small-cap stocks and the Russell 2000, as represented by the IWM ETF.
This obviously had a negative impact on the S&P 500, and for now, the key level to watch for a potential change in trend is the 10-day exponential moving average. It served as resistance during the March decline and then acted as support throughout April. As of Friday, that level was around 7,350, and if it breaks and the index remains below it for three to four days, it would suggest a trend change is underway. That would also likely coincide with NVIDIA’s earnings report.
NVIDIA once again finds itself heavily overloaded with call positioning, and unless the stock sees a meaningful pullback ahead of earnings that helps reengage put demand, I think the most likely outcome is another post-earnings sell-off.
Implied volatility for NVIDIA is currently in the mid-70% range for the May 22 expiration, and I am fairly certain it will be closer to, or even above, 100% by 4 p.m. ET on May 20. That means both calls and puts will become significantly inflated in value ahead of the results, and once earnings are released, implied volatility on those near-dated options will collapse. In turn, that should result in a substantial amount of option premium and delta value across the board being erased.
So unless NVIDIA is able to truly blow traders away with its results, the stock likely faces the usual “sell-the-news” reaction, or, as I like to call it, the mechanical unwind.
–Mike
Glossary by ChatGPT
- Bull Flag — A continuation chart pattern that signals a potential upward move following a consolidation period.
- Call Positioning — The concentration of bullish call option exposure in a stock or index.
- Credit Spread — The yield difference between bonds of differing credit quality, often used to measure risk sentiment.
- Delta — A measure of how much an option’s price changes relative to movements in the underlying asset.
- Exponential Moving Average — A moving average that places greater weight on recent price data to identify trends.
- HYG ETF — An exchange-traded fund tracking the performance of US high-yield corporate bonds.
- Implied Volatility — The market’s forecast of future price movement embedded in option prices.
- JGB — Debt securities issued by the government of Japan.
- Mechanical Unwind — A rapid reduction in positioning or option exposure that mechanically pressures prices lower.
- PPI — An inflation measure tracking changes in prices received by producers for goods and services.
- Russell 2000 — A stock market index measuring the performance of small-cap US companies.
- Sell-the-News — A market reaction where investors sell an asset after a widely anticipated positive event occurs.
- Spread Compression — A narrowing in yield differences between two securities or markets.
- Treasury Yield — The return investors earn from holding US government debt securities.
Disclosure
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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Mott Capital's Market Chronicles May 15, 2026 1:45 PM