Daily Economic Update: October 10, 2023

 

Long end of the yield curve is down double digit basis points to start the day as they catch a flight-to-quality/haven bid and Fed officials seemed to lean slightly dovish yesterday.  The 2Y is down ~8bps to 4.99% and the 10Y is down ~12bps to 4.67%. 

Yesterday's Fedspeak seemed to indicate higher bond yields can have an impact on the path of policy rates, perhaps leading to no additional rate hikes.  Both Logan and Jefferson highlighted the tightening of financial conditions driven by the recent rise in the 10Y yield as important consideration in assessing whether rates are sufficiently restrictive to return inflation back to 2%.  Logan pointed out that the reason for the increase in long-term yields matters for policy, if the driver of the increase is more driven by increases in the "term premium", then Logan would be more inclined not to hike.  Jefferson highlighted that rising yields could change investors attitudes to risk and uncertainty and act as additional tightening.  However, both officials were careful with their words, also noting that higher yields could be investors assessing the underlying economy as stronger than anticipated.  The nuance in both officials words seems to indicate that they might be familiar with Milton Friedman's interest rate fallacy whereby he stated: "Initially, higher monetary growth would reduce short-term interest rates even further. As the economy revives, however, interest rates would start to rise. That is the standard pattern and explains why it is so misleading to judge monetary policy by interest rates. Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy."

The IMF revised up their U.S. growth forecast (in real terms) for 2023 to 2.1%.  The forecast for U.S. 2024 is 1.5%. This morning's NFIB Small Business Optimism index fell to the lowest in 4 months and continues to cite inflation and labor quality as tops concerns.  Ahead on the day is Wholesale Inventories, more Fedspeak and the ongoing developments in the Middle East.

XTOD: Israel's response to the unprecedented multi-pronged attack by Palestinian gunmen from the Gaza Strip will 'change the Middle East,' Prime Minister Benjamin Netanyahu said

XTOD: Dallas Fed President Lorie Logan, who has been at the hawkish end of the FOMC, takes seriously the recent run-up in Treasury yields and term premiums, in particular. 

Her conviction about the need to hike again sounds like it is diminishing as a result.

XTOD: According to WSJ, "Evergrande had the equivalent of more than $332 billion in liabilities by June, which included money owed to suppliers, unfinished projects and its bond and loan obligations."

This is substantially more than Argentina's external debt.

XTOD: Claudia is a baller. Create a whole new field. Win the Nobel Prize. Put out a short and understated tweet with a typo to celebrate.

XTOD: Overall Leasing Demand Turns Negative ⁦ @CoStarGroup Property Markets Give Back 26 Million Square Feet, Add 151 Million Square Feet of New Supply #CMBS

XTOD:  @MBAMortgage ,  @NAHBhome , and @nardotrealtor  just wrote a letter to Fed Chair Jerome Powell.  They’re asking for… 1. No more rate hikes   2. The Fed to “not sell off any of its MBS holdings until and unless the housing finance market has stabilized”

XTOD: My continued takeaways - The real estate industry faces a massive recession (in early stages), Fed should continue MBS roll off, the Fed should hike another 25bps. This industry and these people are destroying the future of America.

https://x.com/Reuters/status/1711435371530092553?s=20
https://x.com/NickTimiraos/status/1711366366861688955?s=20
https://x.com/michaelxpettis/status/1711399376914915740?s=20
https://x.com/florianederer/status/1711360986739802580?s=20

https://x.com/danjmcnamara/status/1711430553558249536?s=20
https://x.com/NewsLambert/status/1711435460197695746?s=20
https://x.com/DonMiami3/status/1711435863899725909?s=20