The month of November is closing as the best month of the year for both stocks and bonds. The S&P is up ~8.5% on the month, the 2Y yield is at 4.66% (it started the month at 5.07%), the 10Y yield is at 4.30% (it started the month at 4.90%). Reportedly it was the best month for bonds since something like 1985.
Yields continued to move lower again yesterday. The move lower in Treasury yields came despite of the higher than expected 2nd reading of 3Q GDP, which was 5.2%. Lower inflation readings in Germany, the Governor Waller discussion the other day, Bill Ackman, some easing of geopolitical tensions etc. all seem to have helped fuel bets on lower yields. Yesterday's Fed's Beige Book showed some slowing in economic activity, easing in labor market conditions and moderating in inflation, seemingly also signaling "goldilocks". Something to keep an eye on is the continuing chatter that the Fed may look to change their inflation target when they complete their next policy review over the course of 2024 and 2025. Yesterday's comments from Richmond Fed Pres Barkin where he stated he's open to an inflation target range, importantly after we hit the 2% goal, is definitely making the rounds with some bond bears.
On the day ahead we get jobless claims and the Fed's preferred inflation measure with PCE. The OPEC+ meeting and impact on oil will also be watched, reports so far this morning is that there is a preliminary agreement for an additional output cut of 1 million barrels per day.
If you recall much of the last two months have featured discussions around risk premiums and term premiums in bond yields. We only have to go back to November 1st FOMC to recall Powell discussing how higher yields were helping do some of the Fed's work in tightening financial conditions and just yesterday Mester had reiterated this point. With yields now falling from their recent highs, it will be interesting to see if Powell or other's show any concern at the loosening of financial conditions.
On the topic of risk premium, I thought this description of the components of long term interest rates by Deutsche Bank's Matthew Raskin on MacroMusings was worth sharing (the full show transcript is here):
On the topic of risk premium, I thought this description of the components of long term interest rates by Deutsche Bank's Matthew Raskin on MacroMusings was worth sharing (the full show transcript is here):
"so my framework for thinking about longer-term interest rates… I guess I would describe it as the expectations theory with time-varying risk premia. What I mean by that is, I think of term interest rates on default-free instruments. So, I'm thinking about US Treasuries as a function of two things: one is expectations for the path of short-term interest rates over the life of the bond, and two is a risk premia or term premia, which is an excess expected yield over and above that expected short-rate path, which is compensation that investors get for bearing interest rate risk in a longer-term bond....I actually think it's helpful to break that expectations piece down further into two pieces, one of which is expectations for the long-run neutral policy rate. That's the short-term interest rate that will prevail when the economy is in equilibrium. In a nominal space, I think of that as a function of expectations for R-star or the neutral real rate, and expectations for longer-run inflation, which should be a function of the Fed's inflation goal. Now, that real piece, that R-star-neutral real rate, is not something that's controlled by the Fed. I think that's a function of fundamentals like productivity growth, demographics, and other things that alter the balance between savings and investment. That's one piece of the expectations component. I think the other is expectations for interest rates over the cycle, so over the next few years, and the extent to which interest rates will deviate from that long-run neutral level. And so, I do think the Fed controls that, but with constraints that depend on its goals, but they decide how to trade off their inflation and unemployment objective...Those three things together, I think expectations for long-run neutral, expectations for the Fed policy cycle, and then term premia, for me, at least, are a useful framework in thinking about moves in longer-term interest rates, and I think I found them quite useful in applying to what we've seen over recent months in terms of the big moves in rates....."
XTOD: We have entered the peak soft landing narrative zone!
XTOD: Nominal GDP grew at an annualized 9% rate last quarter!
XTOD: To put this in perspective, this is higher than any quarter, except for one, during the entire 2007-2019 period. Higher than the 'recovery' from the Great Recession, or during any of the prepandemic Trump years.
XTOD: Elon saying “Go fuck yourself” live on CNBC and them not expecting it, so there was no profanity delay, and therefore it violated FCC guidelines means CNBC gets fined. Hilarious https://twitter.com/i/status/1730000411501687175
XTOD: Musk: “The only reason I am here, Jonathan, is because you are a friend.” Andrew: “I am Andrew.”
XTOD: Henry Kissinger, the child refugee who rose to become US secretary of state and defined American foreign policy during the 1970s with his strategies to end the Vietnam War and contain communist countries, has died. He was 100.
XTOD: I've said this often If you are doing the exact same things as people with better genetics than you, that work just as hard as you do how on earth will you ever catch them?
You won't unless you take a different, more contrarian route but you have to be comfortable in your own skin to do that
XTOD: There is nothing so pointless as delegating work that should not be done at all.
