Hey friends! Happy Sunday! What a week we have ahead of us! Between FOMC decision day on VIXperation, major econometric releases in the housing market, some important earnings reports, and $123B in Treasury auctions, there's no shortage of event volatility catalysts to watch.
Earnings season is wrapping up, but we still have some significant reports to watch from a number of different key players during an otherwise light week of reporting.
Home builders: KBH, LEN - Curious to see what home builders are saying as we've seen business conditions deteriorate with an increase in supply, price cuts on new and existing homes for sale, mortgage rates more than doubling this year trough-to-peak, near record low home buyer sentiment, and an economy in a technical recession.
Industrials: AIR, APOG, FUL
Restaurants: DRI - Restaurants are likely to continue to face challenging conditions as the cost of labor has risen and stayed sticky to the upside, along with food, gas, and electricity costs on the rise. DRI may shed some light as to what challenges they're seeing across their 1,867 locations.
Retail: AZO, COST - COST is one of the more resilient retailers given that it caters to those who are eager to save money in an environment of rising costs.
Shipping: FDX - After last week's removal of 2023 guidance, reduction of operations, and grim economic outlook, what FDX says on their conference call will be interesting. Even moreso how the market reacts. Will they see this as company-specific or something more meaningful? One way to tell is to look for sympathy selling (or the lack of it) with other related companies, like UPS.
Staples: GIS - Consumer staples have been very resilient, with institutional allocators the most aggressively long this sector since the Great Financial Crisis by some measures. GIS is benefiting from the trend of people eating more at home as well.
Tech: ACN, CAMP, FDS, IBEX
Travel: TRIP - Travel trends appear to be softening as many are deferring or outright canceling plans to travel, particularly by air. As a result, companies that help consumers plan and take trips are likely to see a challenging environment both now and for several quarters ahead.
Lots of information on housing comes out this week! With signs that both existing and new home sales are slowing, prices falling mortgage rates more than doubling trough-to-peak, and home buyers having a low appetite for new purchases, it will be interesting to see what all the data tells us. I suspect that we see more signs of trouble in residential real estate.
Then we have the Fed on Wednesday, which I'll cover more below, with a pivotal rate decision that is likely to set the tone until the next meeting in early November. We also have volatility productions expiration (VIXperation) on the same day, which is likely to catalyze further volatility, especially as it is coming after OpEx which complicates hedging to some degree.
On Thursday we have Initial Jobless Claims, which have been surprisingly resilient, but perhaps one reason is that there remains two jobs available for every one person seeking work. Whether or not labor force participation rises will be a key question moving forward as to how sustainable this apparent tightness in the workforce remains.
Friday brings us a slew of PMI data and a speech from our man main Jerome Powell. Services and Global Composite PMI data has been in contraction and is expected to continue as such, whereas manufacturing has been teetering just above those levels. It is expected that weakness continues within the PMI data set.
FOMC Rate Probabilities
The Fed is likely to hike rates by 75 bps on Wednesday. Fed Funds Futures assign an 82% probability to that outcome. Additionally, we've seen QT kick up to a run rate of up to $95B/month in September. $60B of that in bonds and $35B in mortgage-backed securities.
This is coming during a time when Treasury debt issuance was upscaled 2.5 fold in the third quarter, and likely to see similarly high levels in the last quarter of the year as interest rate expenses and budget-driven borrowing drive higher liabilities.
There's a lot of talk about a materially higher terminal rate than what was expected by markets even weeks ago. At this point probabilities are even pricing in a 40% chance of a rate as high as 5.25% in the first quarter of 2023.
One thing is certain, the Fed has a difficult battle to fight against inflation, and they don't necessarily have the right tools to fight that battle. Their tools focus on curbing demand, whereas a big part of the inflationary pressure originates from inelasticity of supply.
With at least $123B of Treasury debt securities on offer this week on Monday, Tuesday, and Thursday, it will be key to watch the 20-year bond auction and 9-year 10-month TIPS auction for how healthy demand is, particularly from foreign counterparties.
The last 10-year auction we had was suboptimal, and more like it could signal that there's more pain to come in fixed income.
Look out for a week that may be full of twists and turns. Trading on Fed day is generally ill advised unless one is very experienced and understands all of the dynamics at play. Usually the initial reaction to policy decisions takes at least two days for the market to fully price in.