Nasdaq rallies as long-dated bond yields fall back

Nasdaq led a rebound in equity markets, up 1.7% in morning trade, demonstrating the sensitivity of leading tech stocks to the movement of long-dated bond yields. Yesterday’s marked sell-off in 30-year treasuries was partly caused by a disastrous bond auction, pushing yields up a marked twenty basis points to 4.8%. Bond yields fell back earlier today, but these sharp upticks could become more frequent. Elsewhere, oil rallied over 2% on bargain hunting after a recent sharp decline.

TODAY’S MAJOR NEWS

Powell cools market hopes for early rate cuts

Federal Reserve Chair Jerome Powell stated yesterday that the central bank is “not confident” that interest rates are yet high enough to finish its battle with inflation, saying that the central bank would not hesitate to tighten policy further if necessary. Powell is trying to convince the markets that he remains hawkish; he thinks that if consumers believe the Fed is about to pivot, they will start spending again, reviving inflation. The system still has enough surplus cash to help, although the surplus is rapidly shrinking.

We may see the Fed push rates higher if necessary to do so. Still, the bigger story shortly is whether we can get the government funded beyond next Friday without another credit downgrade that could send interest rates higher again, doing more of the work for the Fed. It’s perhaps only a matter of time before we see a downgrade by Moody’s, and that may be just the beginning. On top of this, the growing government debt burden is becoming harder to finance – as yesterday’s bond auction exemplified.

Treasury auction tanks, fewer foreign buyers

Another explanation for yesterday’s rise in bond yields, alongside Powell’s hawkish comments, was yesterday’s disastrous $24 billion 30-year auction, undermining investors' hopes that demand would hold up for government debt.  The 30-year Treasury yield saw one of its biggest one-day jumps since June 2022, rising twenty basis points to 4.80%.  The so-called 'tail', the price spread between the average competitive bids in the bond auction, was the biggest on record at 5.3 basis points, indicating scant interest.

Foreign bidders declined from 65.1% to 60.1% of the auction, the lowest since Nov 2021. Bank’s trading desks were forced to take up a significant 24.7% of the auction, double the recent average of 12.7%, and the highest since Nov 2021. As we’ve pointed out for some time, the willingness of Chinese and Japanese buyers to buy new US debt could be a problem, given the volume that will be offered. For those keen to know more, check out TreasuryDirect, https://treasurydirect.gov/auctions/results/.

US consumers turn more gloomy

US consumers are starting to feel the pinch of higher interest rates, and worryingly, inflation expectations are becoming ingrained. “The long-run economic outlook slid 12%, in part due to growing concerns about the negative effects of high-interest rates," was the downbeat statement accompanying the University of Michigan’s preliminary reading on consumer sentiment.

• The consumer sentiment came in at 60.4 this month, far less than the 63.7 expected and the lowest for the measure since May
• Consumer expectations for long-run inflation rose to 3.2%, a move up from 3% last month

Fed policy criticized  – on the football field!

“The Federal Reserve wants to impose unnecessary capital rules,” was an unexpected ad that ran during a commercial break in the Buffalo Bills versus Cincinnati Bengals game on Sunday night. Wall Street lobbyist Center Forward ran an ad focused on sad men and women working harder to buy groceries. It implied that the Fed is to blame for seeking to impose “unnecessary capital rules that will raise costs for everything we buy.”

Plans unveiled in July, known as Basel III, require big banks to hold more capital in reserve to survive another squeeze like the 2007-2008 credit crunch when many banks were caught short. The Fed says the failures of Silicon Valley Bank, Signature Bank, and First Republic Bank highlight the need. If approved in 2025, the eight largest US banks would be required to boost what they see as ‘dead capital’ by a fifth rather than using it for investment and to make loans.

Will the Fed get ‘sacked,’ or will its plans reach the end zone?

TODAY’S MAJOR MARKETS

Nasdaq leads the rally

• Nasdaq rose 1.7% as yesterday’s hike in bond yields was digested and seen as temporary, with the S&P 500 and Russell 2000 up 1.2% and 0.7% respectively
• Foreign equity markets were still suffering a hangover from yesterday’s turbulence, with the FTSE 10 off 1.3%, the Dax off 0.8%, and the Nikkei 225 off 0.2%
• The VIX, Wall Street’s fear index, fell to 14.6 (the year’s low was 13.0)

Bonds yields and the dollar unchanged

• 2-year yields were four basis points higher at 5.07%, while 10-year yields were unchanged at 4.64%
• The dollar index was unchanged at 105.9
• Versus the dollar, the Euro and Sterling were unchanged while the Yen was ff 0.2%

Oil rebounds after recent slide

• Oil prices rebounded 2.2%, continuing Thursday’s rally, rising to $77.4 per barrel
• Spot gold prices fell 1.5% to 1,941 per ounce, while Silver fell 2.6% to $22.3 per ounce
• The grain and oilseed markets are mixed to mostly weaker following yesterday's USDA WASDE crop report
• This removed support from the soybean market while providing little fresh support in either the corn or wheat markets amid soft demand and ample world supplies

Analysis by Arlan Suderman, Chief Commodities Economist: [email protected]

Market outlook by Paul Walton, Financial Writer: [email protected]