Nasdaq rallies on lower long rates, again

Nasdaq rose 1.6%, spurred by a fall in bond yields as the Fed held interest rates – despite the warning that they might go higher. Today’s employment data, a primary Fed concern, points to a tight labor market, strong job growth, and buoyant wage inflation. Still, official rates are on hold for now.

Bottom line: Risk-on.

TODAY’S MAJOR NEWS

Bonds rally on Fed’s no-rate rise announcement

The Fed kept the door open for another rate rise as it held its benchmark interest rate in the 5.25%-5.50% range, yet forward rate markets are still betting on unchanged rates until next Easter – something which might be a little optimistic. Bond markets rallied on the news, with 2-year Treasuries falling back to 4.95%, a significant 15 basis point drop, and 10-year Treasuries falling back to 4.79%, a ten basis point drop. This, in turn, takes some valuation pressure off the equity market.

The Fed credited higher bond yields for doing some of its work. "Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain." Nonetheless, the Fed upgraded its economy assessment to "strong" in the third quarter from "solid" in September. "Recent indicators suggest that economic activity expanded at a strong pace in the third quarter," the Fed said. "Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation remains elevated."

Treasury sale will test bond markets

The rally in bonds is timely since bond investors face a steady rise in Treasury offerings at a time when the Federal Reserve and China are reducing purchases. Some analysts estimate that debt security offerings may rise as much as 23% year-on-year in 2024. Absent good news on inflation and Fed rate cuts, there is a risk that this issuance volume would require elevated interest rates, especially at the longer end of the yield curve.

• The US Treasury will offer $112 billion of Treasury securities to refund roughly $102.2 billion of privately held Treasury notes that mature on November 15^th, raising $9.8 billion in new cash from private investors
• The offering will include $48 billion in 3-year notes, $40 billion in 10-year notes, and $24 billion in 30-year bonds
• The Treasury modestly increased its longer-dated debt burden, leading to yields on 10- and 30-year Treasuries initially dropping on the announcement.
• The balance of Treasury financing requirements over the quarter will be met with regular weekly bill auctions, cash management bills, and monthly note, bond, Treasury Inflation-Protected Securities (TIPS), and 2-year Floating Rate Note (FRN) auctions

Strong private payroll data, plentiful job openings

The Job Openings and Labor Turnover Survey (JOLTS) reports that we still see many job openings relative to people looking for work. ADP’s private payroll data was also vital. The Fed doubtless took note of this morning's JOLTS data, which remains a risk factor. It's difficult to bring inflation down to the 2% mandated level when wage inflation remains high, and it's difficult to lower wage inflation when there are still more than 1.5 job openings for every person looking for work.

• Today's JOLTS report showed that job postings totaled 9.553 million at the end of September, ahead of the forecast 9.375 million and up from a downwardly revised 9.497 million last month
• Private payrolls increased by 113,00 in October, less than the 145,000 forecast, up from 89,000 last month, according to this morning's ADP employment report
• In the upcoming Non-Farm Payrolls, analysts expect private payrolls to rise by 143,000 in October, with overall job growth of 183,000; unemployment is expected to stay low at 3.8%; and average earnings are expected to be up 4.0% year-on-year (all pointing to sticky inflation)

US commercial crude oil stocks below average

• US commercial crude oil stocks (excluding the Strategic Petroleum Reserve) are roughly 5% below the five-year average for late October despite rising by 0.8 million to 421.9 million barrels in the week ending October 27
• Distillate stocks fell by 0.8 million barrels, falling to 12% below levels typically seen in late October
• Gasoline stocks rose by 0.1 million barrels, leaving them 2% above seasonal levels.
• Ethanol stocks fell to 21.0 million barrels in the week ending October 27, down from 21.4 million the previous week and down from 22.2 million barrels in the same week last year

TODAY’S MAJOR MARKETS

Nasdaq rallies, ending 3-month downtrend

• The Nasdaq rose 1.6% today, with the S&P 500 up 1.2% and the Russell 2000 up 0.2%
• Foreign equity markets were strong, with a 2.4% rally in the Nikkei 225, a 0.8% rise in the DAX, and a 0.3% rise in the FTSE 100
• The VIX, Wall Street’s fear index, fell back to 16.2

Bonds rally strongly, dollar unchanged

• 2- and 10-year yields fell sharply to 4.95% and 4.79% (and, in the process, almost closing the yield gap)
• The dollar index was unchanged at 106.7
• Versus the dollar, the Yen rose 0.6%, while Sterling and the Euro were unchanged

Oil slips further

• Crude oil prices fell 0.3% to $80.8 per barrel, back to the top of its year-to-date range
• Spot gold prices fell 0.3% to 1,989 per ounce, while Silver was unchanged at $23.0 per ounce
• Grain and oilseed sector were mixed to higher, with only corn and soymeal showing modest losses in the late morning

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

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