The Market Today

Yields Jump to Highest Level Since 2011 on Technical Trading and Powell Comments

by Craig Dismuke, Dudley Carter

Job Cut Announcements Spike on Wells Fargo’s 3-Year Plan but Claims Remain Low: The September Challenger Job Cut Announcement report showed a startling 71% YoY increase in corporate announcements of job cuts.  However, this was skewed by an announcement from Wells Fargo that they would cut as many as 26,500 of their workers over the next three years.  Apart from that announcement, the Challenger report continued to reflect a low level of job cuts.  Also announced this morning, new filings for unemployment insurance fell from 215k to 207k for the week ending September 29, the 4th lowest of the cycle.


Vice Chair Quarles Speaks, Markets Will Remain Focused on Sell-Off and Upcoming Jobs Report: Fed Vice Chair Quarles will speak at 8:15 a.m. CT on bank regulations and community banks.  August’s Durable Goods Orders Report will be finalized at 9:00 a.m.  The initial read showed weaker-than-expected indicators for business investment in equipment.  Also at 9:00 a.m., the August Factory Orders report is expected to show a strong reading.  However, markets are likely to remain focused on the big sell-off in Treasury yields and tomorrow’s labor reports.


Very Strong Data Heading into Tomorrow’s BLS Labor Reports, but Hurricane Uncertainty: Heading into tomorrow’s BLS jobs reports for September, the leading indicators are quite strong.  Both ISM reports projected improved hiring, including the highest reading in history from the ISM Non-Manufacturing’s employment sub-index.  Initial jobless claims for the applicable period were the lowest on record.  Both the New York Fed and Philly Fed sub-indices on employment increased in September.  Assuming an average payroll growth trend of 200k per month, one would correctly expect a payroll report well north of 200k.  However, there is some uncertainty about the results given the impact of Hurricane Florence.  It is expected that the Hurricane could have trimmed 15-25k reported payrolls.  The bigger question, however, will be if average hourly earnings hang on to their August strength.  The trend during this cycle has been the quick reversal following strong earnings reports.


Trading Activity

Yesterday – Strong Data Sends Yields Surging through Top of Recent Ranges: Stocks gained Wednesday with the Nasdaq pushing 0.3% higher, the Dow gaining 0.2% to a new record, and the S&P 500 inching up 0.07%. But it was a big day for the bond market that stole the show and wrote the headlines. The stage for higher yields was set early, as easing concerns about spiraling deficits in Italy pushed Italian yields lower and German yields higher. Treasury yields felt that upward pressure but were less than 1 bps higher ahead of the U.S. session. A strong ADP report added modestly to the overnight rise but a surge in the services ISM (a new high for the cycle, more below) nudged yields through the top of recent trading ranges and set off a round of technical selling that sent yields to their highest finishes in years. The final leg higher followed hawkish remarks from Fed Chair Powell (more below) about the remaining distance for the overnight rate from a neutral setting. The 2-year yield rose 6.1 bps to 2.87%, a new high for the cycle (June 2008). The 5-year yield rose 9.4 bps to 3.04%, a new high for the cycle (September 2008). The 10-year yield rose 11.8 bps to 3.18%, the largest daily jump since the 2016 presidential election and the highest level since July 2011. The 30-year yield rose 11.8 bps to 3.34%, also the biggest daily increase since the election, to its highest yield since September 2014. As a result of the sell-off, the slope between the 2-year and 10-year notes steepened 5.7 bps to 30.5 bps, the largest daily increase since early February and the steepest slope since August 2.


Overnight – Rising Rates Remained a Focus Overnight, Leading Stocks Lower: Global equities turned lower overnight as yesterday’s sell-off in Treasurys persisted and helped to push up sovereign yields around the globe. Japanese stocks slipped 0.6% which was actually one of the better performances in Asia. The Stoxx Europe 600 was 0.6% weaker as most indexes outside of Germany dropped. After holding steady Wednesday in the face of the surge in interest rates, futures were signaling that U.S. equities would move lower at the open. Contracts on the S&P 500 were in the middle of the majors at down 0.4%. With no notable headlines globally overnight, investors remained focused on rising rates. In Asia, Japan’s 10-year yield climbed to 0.15%, the highest level since the BoJ implemented its negative rate policy in January 2016. In Europe, the U.K. 10-year yield was leading the way with a 8.3 bps increases to 1.79%, the highest yield since April 2016. The German and French (highest since June) 10-year yields were up around 6.0 bps. Ahead of the U.S. session, the Treasury curve had continued to steepen with rates adding modestly to yesterday’s increase. The 2-year yield ticked up 0.8 bps to 2.88% as Fed Funds futures continued to reprice the pace of future Fed rate increases. After yesterday’s solid data and upbeat Fed remarks, specifically those made by Fed Chair Powell (more below), the implied Fed Funds rate for the end of 2019 almost completely priced in three additional rate increases for the first time. The 10-year yield rose more, adding as much 4.9 bps to touch 3.23%, a new high since May 2011. Those moves have eased as U.S. traders arrived at work, with the 2-year yield back to unchanged and the 10-year yield up just 1.1 bps at 3.19%.



ISM Non-Manufacturing Hit a 21-Year High: The services sector remained hot in September according the ISM’s most recent PMI, which became the latest data point to confirm the current strength of the U.S. economy. The ISM Non-manufacturing PMI pushed 3.1 points higher last month, touching its highest level since August 1997. Nine of the 10 underlying indexes rose from their August levels while a gauge of inventory levels was unchanged. The biggest underlying improvements occurred in two of the components that drive the headline PMI. The business activity/production index jumped 4.5 points to 65.2, its highest level since January 2004. The employment index jumped 5.7 points to 62.4, the highest level on record. Added to strength in the services sector hiring in yesterday’s ADP report, the outlook for tomorrow’s BLS report remains solid.


Powell Again Described “Extraordinary Times” for the U.S. Economy: In his second appearance this week, Fed Chair Powell reiterated that the U.S. economy is enjoying “extraordinary times” with “a remarkably positive set of economic circumstances.” That’s why the Fed is “gradually moving to a place where [rates will] be neutral”, in order to “sustain the expansion and keep unemployment low and keep inflation right on target, …There’s really no reason to think that this cycle can’t continue for quite some time.” While Powell is seemingly on board with another rate increase in December, he also offered some insight into what he expects into 2019. “Interest rates are still accommodative, …We may go past neutral. But we’re a long way from neutral at this point, probably.”


Mester Says Data to Play Larger Role in Leading Fed Policy: Fed Governor Brainard didn’t discuss monetary policy in her Wednesday comments, but Cleveland Fed President Mester pointed a finger at inflation as what should dictate monetary policy moving forward. Mester noted that it’s “still appropriate to move interest rates up gradually,” but added that “We are basically nearing a new phase of monetary policy. We’re getting close to a phase where we are going to be very dependent on what the data is telling us about the outlook.” “If we end up having inflation move high up”, she said, then the Fed will “need to move policy faster,” and if inflation slows, the inverse would be true. Mester said, “I see inflation staying at around 2 percent provided that we have an outlook that is above-trend growth, unemployment that is low and monetary policy moving gradually, …I don’t see much evidence we have high risk on inflation, that it will pick up precipitously. I think the risks around inflation are balanced.’’

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