Breakfast Bites - US 10Y Treasury Yield crosses 5%

Ayesha
Oct 23, 2023
3 min read

Rise and shine everyone.

The big news this morning is the US Treasury 10Y yield crossing 5%, last seen in 2007.

As rates rose, US Equity futures started selling off, after opening modestly higher. Prices are off their lows now. The Yield Curve continues to steepen currently at -0.13%. As usual, there seems to be some extreme sentiment with “Black Monday” trending on Twitter.

Gold and Oil have pulled back marginally this morning on hopes of de-escalation in the Middle East war. The US Dollar Index is flat at 106.1 and Bitcoin has a bid crossing 30,600.

It’s a quiet Monday on the tap to start the week. Really quiet… with the Fed going into their blackout period so we don’t have any Fed speakers until the end of their meeting on Nov 1.

We’re set to have busy week though with the Bank of Canada and the ECB & Turkey having their meetings on Wed and Thu, respectively.

And finally we have a host of important earnings coming up that could move markets this week - Verizon, Visa, Microsoft, Meta and Amazon.

Asia-Pacific

Asian equities fell sharply across the region Monday to send the MSCI Asia Pac-ex Japan index to fresh 52-week lows. Seoul and Taipei saw more losses. Southeast Asia all lower, India extending morning losses. Japan gapped lower with no real recovery during the day. Hong Kong, Thailand and New Zealand closed for holidays.
Mainland China bourses down sharply on Foxconn probe and property sector concerns as well as breaches of key support levels; Shanghai at one-year low, Shenzhen at four-year low.
Nikkei reported the emergence of BOJ internal calls for further YCC tweaks as JGB 10y yield approaches the effective 1% cap. Article was published in Sunday's morning edition though did not make front page. Last time around as well, there was news printed in the Nikkei and then it so happened that the BoJ did tweak the YCC, so I wouldn’t write this off completely. I am still cautious and doubt that there will be a major change so soon. The BoJ meeting is on Tuesday 31 Oct 2023.
Singapore's annual inflation rate edged up to 4.1% in September 2023 from August's 19-month low of 4.0%, matching market consensus. Cost of transport rose faster (6.3% vs 4.8% in August), linked to private transport; as did healthcare (4.5% vs 4.3%). On a monthly basis, consumer prices went up 0.5%, slowing from a 0.9% gain in August while rising for 2nd straight month.
In a speech, Governor Pan of the People’s Bank of China reiterated prudent monetary policy will be more precise and powerful with counter/inter cyclical adjustments while maintaining stable money and credit. Noted a variety of monetary policy tools should be used comprehensively to keep growth in money supply and social financing in line with nominal GDP growth. - I’m not that’s a clear indication of anything, and markets have not responded to this or even the injection made last week.

Europe, Middle East, Africa

European equity markets under pressure. Follows broad weakness in Asia.
Volkswagen on Friday after the close cut profit outlook in prelim-Q3 release, citing raw material hedges. Barclays suggested profit warning "out of the blue" as company saw no issues with consensus as recently as 13-October. Hedges against commodity price swings led to €2.5B non-cash loss the carmaker "does no longer expect to be able to compensate" by the end of the year. Auto manufacturers in Europe continue to remain under pressure. Mercedes apparently slashed list prices by as much as 30% on some models.
Market’s remain quiet ahead of the ECB rate decision on Thursday. While most are pricing in a pause, particularly after the last inflation reading, markets remain pensive.

The Americas

Chevron Corp. agreed to buy Hess Corp. for $53 billion, a deal aimed at boosting production growth as the US oil industry bets on an enduring future for fossil fuels. In an all-stock transaction, Chevron will pay $171 per share for Hess, a premium of about 10% to the 20-day average price. This is a good deal for Chevron because Hess has a solid portfolio with access to Guyana.
Other than rates surging, it’s quiet in the US as well. That’s the major issue moving markets now. With inflation breakeven’s soaring, it would seem that the long end is now pricing in higher inflation levels, and the tightening of financial conditions. From here on out, what we likely need to see for rates to stabilize is some slowdown in the US economy, or risk assets selling off. A change in heart from the Fed, in terms of rate cuts, may also make a difference.

Chart of the Day from Goldman Sachs

30Y inflation breakevens have moved up to YTD highs.