This week starts with the 10Y yield already up ~9bps and back over 5% at 5.01% and the 2Y climbing around 5bps to 5.12%. The catalyst cited is the unwinding of "flight to quality" positions as we headed into the weekend with unknowns in the war between Israel and Hamas. The last time yields were above 5% "the number one song on the Billboard Hot 100 chart was "Crank That (Soulja Boy)" by Soulja Boy Tell'em (according to ChatGPT at least, I didn't verify the result). This song held the top spot for several weeks in 2007.. .
Equities are currently looking weaker ahead of tech earnings. I'm uncertain as to whether Chevron buying Hess will increase the value of Hess toys collections.
Markets continue to wrestle with "higher for longer" as solid economic data has led Fed officials to talk up the prospect of rates not returning to lower levels for some time. The curve has continued to un-invert via a bear steepening as opposed to the consensus view of earlier in the year that the dis-inversion would come from lower yields in the front end of the yield curve, via Fed rate cuts. The "there is no way 10Y yields will get over 3% crowd, turned into the there is no way the 10Y yield will get over 4% crowd and is now the there is no way rates will stay over 5% crowd". On the fringes you continue to hear some talk from the fiscal dominance camp or the treasury market instability camp around how the Fed will be forced into Yield Curve Control, but overall, the talk is about term premiums and the lags of monetary policy as the areas for markets to focus.
Talks of strikes have fallen out of the media cycle but UAW strike is still out there and there's still no Speaker of the House. Sunday's 60 Minutes reminding viewers that Chinese espionage is a threat to American's way of life.
The week ahead features GDP, PCE, Bank of Canada, ECB. The Fed is in a blackout period as we approach the November 1 FOMC decision (markets are pricing in almost certainty of the Fed holding policy rates):
XTOD: Real Life Dune https://x.com/netcapgirl/status/1715747743212130398?s=20
XTOD: Workers are the unhappiest they've been in 3 years—and it can cost the global economy $8.8 trillion https://www.cnbc.com/2023/10/02/-employee-happiness-has-hit-a-3-year-low-new-research-shows.html?utm_content=Main&utm_medium=Social&utm_source=twitter%7Cmain
XTOD: Fed's latest Financial Stability Report is out. I thought it was less interesting than usual, in part because there were few special "box" sections. But there are still some helpful things: Fed staff finds term premium still historically low (yields have risen a bit since Sept). Common measures of Treasury market liquidity are still not good, Median interest coverage ratios for firms remain within historical ranges, in part due to much of the debt taken out a low rates. Some deterioration is being seen in the lowest rated debt. Default rates on lev loans are rising but still historically low. House prices are expensive on a price to rent ratio. Bad for home buyers, but it is also boosting wealth of homeowners. Almost ALL homeowners have some equity. Does not look like there will distress there. Household credit quality overall remains within historical ranges - auto loan and credit card defaults rose but are not high.
XTOD: What, precisely, can "monetary policy" do in the face of commodity shocks, transport and production shocks, and real-resource strains?
XTOD: Ah it's a Zoltan weekend I see. 1. There is a yield curve shape that would require a Fed response - current shape is not this shape by 100's of bp. 2. Before the Fed bought to constrain a 300bp positive 2's 10's slope they would change regulations on SLR to encourage private sector bank curve riding again 3. Long term treasury buying (QE not YCC) in a wartime environment is certainly possible. What trade would one do today? Buy gold? Sure it's already up. Sell USD. Probably but for what?
XTOD: I criticize parts of the Fed all the time and will continue to do so. It’s a civic duty! With one huge exception. @FedFRASER is the most fabulous collection of documents and professionals there is, I will brook no dissenting views.
XTOD: Your time is your most valuable asset. Leverage it wisely by focusing on what truly matters. #TimeIsLeverage
XTOD: Thank you for the kind words. I hope people listen to the speech. https://twitter.com/i/status/1715736101627834414
XTOD: Complexity is job security for many advisers.
XTOD: Connecting everything tightly together has downsides
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