Bonds on the move as the ‘higher for longer’ message hits home. The US 10yr Treasury yield advanced to a new 16-year high at 4.646%, whilst the 2yr was steady. As I noted last week the potential was for the long end to move and front of the curve to steady, producing steepening + volatility. The 2s10s spread has steepened to –0.51%, becoming way less inverted than the roughly –1% it was at a month ago. The market has consistently doubted the Fed – for good reason – but now is buying what the FOMC is selling in terms of the guidance. We can see this with the blowout in real rates with the 10yr TIPS up to 2.3%.
As for stocks – it’s all about bonds – sharp moves we are seeing creates volatility but also we would tend to think that as the 10yr advances further there will be more signs of stress across assets. We are seeing the broad US market breaking down at levels we expected it might, the question is how low and how long? The S&P 500 trades about 18x vs 15x when the 10yr was last at this level so we might expect further drawing down. I just don’t think the market is set for the kind of potential credit event that can take place. Here’s JPM’s Kolanovic:
“...we are not saying that the situation now is the same as in 2007-2008 ... But signs of stress are beginning to appear... lags are longer this time, which has resulted in complacency and broad acceptance of the soft landing, or even no-landing, thesis”.
European stocks are mixed but trend is definitely bearish; Wall Street was flat, closing off the lows with E-mini futures rejecting the 4,276 area yesterday. German inflation today, US unemployment claims later. These have trended lower for the last couple of months, suggesting there is ample strength in the labour market for the Fed to keep rates higher for longer. After peaking in June with three straight weeks in excess of 260k, weekly jobless claims have declined to around 220k lately, touching a 6-month low of 201k in the week September 16th. Fed chair Jay Powell is due to speak later as well.
The US dollar trades a little lower this morning after driving up to a fresh cycle high yesterday on those Treasury floating up. GBPUSD made a new low at 1.2110, EURUSD is testing the 1.05 area – key horizontal lows from Jan and Mar; whilst USDJPY pushed further into the 149 handle. DXY heading for 11th straight weekly gain.
Oil continues to march higher to highest in more than a year with front month WTI touching $95 as crude inventories fell more than expected. Cushing stockpiles declined by 943k to their lowest level in more than a year, with the EIA reporting total US inventories dropped by 2.2m barrels in the week to September 22nd. Sense that delivery could be impacted by the decline at Cushing, which is feeding into widening timespreads as the curve remains heavily in backwardation – ie front month trades at a big premium to contracts further out, indicative of tight physical fundamentals and a market that just wants to go higher.
Three days to a US government shutdown. Aside from the spending implications, the Fed could be hobbled by delayed data. Meanwhile SEC Chair Gary Gensler warned the impending government shutdown could impede its oversight,
"If a company were deciding to go public or raise offerings, they'd want to go effective before Friday if they're ready to. If not, they might be in a sort of subliminal state where they can't access the markets because we can't effectively review those".
Gold – new lows as real rates and USD drive higher – 10yr TIPS nudging 2.3%! That has doubled since
April – market is buying higher for longer.
Risk Warning: this article represents only the author’s views and is for reference only. It does not constitute investment advice or financial guidance, nor does it represent the stance of the Markets.com platform.When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice. Trading cryptocurrency CFDs and spread bets is restricted for all UK retail clients.
Following the ECB's decision to hold interest rates steady, Goldman Sachs and JPMorgan Chase revised their expectations for future rate cuts, considering the economic resilience and potential developments in EU-US trade relations.
As U.S. stock markets soar to record highs, firms like Goldman Sachs and Citadel are advising clients to buy relatively inexpensive hedges to protect against potential losses due to a confluence of risks.
As excess cash in the US financial system shrinks, calls grow to reassess how to measure liquidity tightness and which benchmarks the Fed should target.
set cookie
