Bond yields fall back, Nasdaq rallies

Rising bond yields threaten equity market valuations, notably tech stocks, but benefit the US dollar’s attractiveness – themes which continue to play out in markets. Lower bond yields benefited the equity market today, notably the Nasdaq, but for how long? Housing sales data was very weak, unsurprisingly given record high mortgage rates.

Bottom-line: risk-on.

TODAY’S MAJOR NEWS

Treasury yields continue to rise …

The long-end of the yield curve continues to push higher, with yields on 10-year Treasuries hitting fresh 16-year highs at 4.62%. This threatens the basis of equity market valuations, notably tech growth stocks, but attractive rates potentially benefit the US dollar. The Fed continues to get the blame for the higher rates, preaching a message of “higher for longer.” Markets have baked in this message. Forward interest rate expectations, captured in the CME’s FedWatch tool, reflect a 60% probability that rates remain at current levels through next spring.

We’re now seeing the restructuring of US debt markets after years of near-zero interest rates and massive government stimulus which created record debt. An increased supply of Treasuries necessitates a larger supply of buyers, and higher yields are needed to attract sufficient buyers. A much greater problem could emerge over the coming year as rising interest rates consume an even greater portion of the federal budget, bringing the whole issue to a head as the next debt ceiling is negotiated shortly after the 2024 elections.

Investors should remember these risks for debt markets, the economy and so, indirectly, for equity markets:

• Higher bond yields mean higher mortgage rates, surging to a 23-year high at 7.31% this week
• A weaker housing market could result, and that has an impact on economic activity
• The Fed continues to reduce its balance sheet from the Covid era stimulus, buying roughly $1.14 trillion fewer debt certificates per year
• Fears of another credit downgrade, likely by Moody’s this time, but we can’t rule out another one from either S&P or Fitch.
• Japanese investors, once the largest foreign holders of US debt certificates, are bringing more of their money home as Japan’s central bank starts to unwind yield curve controls
• China also has fewer dollars to recycle as its exports decline, allowing it to reduce purchases of US debt certificates

Home sales index disappoints

The housing industry continues to indicate a lot of pent up demand for housing, but that demand isn't translating into sales currently due to high mortgage rates and uncertainty about the economy

• The pending home sales index for August fell 7.1% month-on-month to 71.8, down from a downwardly revised 77.3 in July (the index is based on contract signings that typically lead to a closing)
• Pending transactions are currently down 18.7% year-on-year

Unemployment claims continue to reflect tight labor market

We watch first-time claims for unemployment benefits as a high frequency indicator of labor market conditions and a reflection of the general state of the economy. These numbers continue to reflect a very tight labor market.

• First-time claims firmed were pretty much unchanged at 204,000 in the week ending September 23, rather than an expected rise, up from 202,00 the previous week
• The four-week moving average remains low at 211,000 claims
• Continuing claims for the week ending September 16 rose by 16,000, but they also remain low at 1.670 million

Few surprises in G2 GDP

• The third reading of gross domestic product for the second quarter had a few surprises this morning
• Second quarter GDP growth remained at an annualized rate of 2.1% growth, below analyst expectations that it would be revised higher to 2.3% growth
• Personal consumption expenditures in the quarter grew at an annualized rate of just 0.8%, down from analyst expectations that the number would remain unchanged at 1.7% growth

TODAY’S MAJOR MARKETS

Nasdaq bounces on lower bond yields

• Equity markets rallied after recent weakness, led by a 1.2% rise in the Nasdaq, while the Russell 2000 and S&P 500 rose 1.1% and 0.9% respectively
• Foreign markets also were mixed overnight, with the Nikke1 225 off 1.5%, while the Dax was up 0.6% and the FTSE 100 was up 0.1%
• The VIX, Wall Street’s fear index, fell back to 17.4

Bond yields pause, dollar sees profit-taking

• 10-year yields traded down to 4.62% and 2-year yields fell back to 5.10%
• The dollar index saw profit taking, down 0.4% to 105.8
• Versus the dollar, Sterling was up 0.5%, the Yen was down 0.1% and the Euro was unchanged

Oil falls back, gold sees selling

• Crude oil prices fell 0.9% to 92.8 per barrel on profit-taking
• Spot gold prices fell 0.6% to $1,880 per ounce, while silver was unchanged at $22.7 per ounce
• Grain and oilseed prices traded modestly lower overnight ahead of today’s set of USDA reports

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

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