Happy Sunday, friends. We have a very busy week ahead of us, with plenty of potential volatility catalysts, from consequential economic data like CPI, a dozen Fed speaker appearances and Q3 earnings season kicking into full gear on lucky Friday the 13th.
We also will be parsing how the markets react to increasing geopolitical tensions in the middle east after this weekend's heartbreaking and tragic events.
Before we look forward, however, let's have a look at the Big Picture.
The Big Picture
In a positive sign for inflation, but a negative sign for US workers (and consumers) wage growth is falling, having peaked in spring of 2022. The secondary impacts of this are already being felt to some degree, as we saw negative consumer credit growth in September and many signs pointing to a significant decline in overall spending.
Less demand is good, right? Yes, it helps to subdue inflation, but it won't be pleasant for earnings or economic data should the trend continue.
Meanwhile, the seemingly endless rise in rates has put increasing pressure on unrealized bank losses after two quarters of reprieve. While the Bank Term Funding Program helps to ameliorate some of this stress, it is likely that we're going to see increasing stress within regional banks moving forward as commercial real estate is also dragging down their loan books.
Overseas we've seen a similar sell-off in sovereign duration, which the Austrian 100-year government bond crashing 75%.
This global rise on the longer-end has certainly helped to steepen the inverted yield curve close to neutrality. It's important to remember that prior steepening episodes into positivity have been harbingers of suboptimal economic and market outcomes, particularly when they were bear steepeners (with the long end leading the way higher) like we're seeing now.
The 10-year note is rapidly approaching 5%, currently yielding 4.784%. Many had prognosticated that any move above 4% would lead to a meltdown, but my thought is that we have enough support mechanisms in place from the Fed and implicitly from regulators like the FDIC and Treasury that it will require a higher yield to set into motion such an event. My thinking is pushing above 5% would markedly increase these risks, rather than looking at 4% as the key level.
It's important to remember that over $100 trillion of global debt keys off of 10-year yields, so this alarming rise has put a lot of credit markets under stress around the world.
In the here and now, however, Treasuries are looking a bit oversold (even though flows, which we'll get to later, don't show any real selling). I think we could have a bit of a reprieve in rates and the dollar, but I don't think it marks the end of the move. If anything, I think it will be a consolidation period.
