Read on the Trading Floor - 19 Oct 2023
Today’s focus… Slower / Higher / Longer
Macro Themes At Play
Theme 1 - Powell followed the lead of the broader board but the initial dovish reaction hasn't stuck
#1. Nov was taken off the table, #2. Dec is still on the cards, #3. the data is still expected to slow despite an aggressively strong Q3 performance from the US economy, #4. fight is not over, inflation still too high and #5. need to proceed carefully ... Powell’s remarks closely tracked those of Logan, Jefferson and Williams over the past few days. H/T The MacroTourist, this was a view
flagged in his excellent post Setting the tone for the last two months of the year.We've seen the front end of the curve rally as the market takes out any chance of a Nov hike (Chart 1) and has simultaneously dropped the odds of a Dec hike (Chart 2). The Fed still seems comfortable that the data is trending towards their expected path. {Liberty Street Economics (aka NY Fed) wrote an excellent piece yesterday on the strength of the US consumer. An update on the Health of the US consumer}
Chart 1: CME Fed Watch Tool... 0% chance of a Nov hike ...
Chart 2: CME Fed Watch Tool... probability of a Dec hike has also dropped over the past month from 36% to 30% ..
Will US2s10s un-invert in the coming days?... higher for longer, stronger data, traders and economists pushing back their recession calls, Fed confirming another pause so the only thing to move is the long end? 5.19% US2s into the close as 10s hits 5% ... -20bps and almost back to par.
It feels like we've now entered the "longer" phase from higher. First it was slower (down from 75bps hikes to 12.5bps on avg per meeting), then the clear message was higher and as we near "substantially restrictive" territory, we're entering stage three = the longer camp?
Finally, equities are a sea of red into the close, despite "dovish" remarks...
Powell did little to change the recent course of action as mag7 comes under pressure, Tesla sells off 10% (Musk's consumer credit warning), geopolitical tensions, Santa rally crowd getting squeezed, higher real rates, pressure at some stage was going to come on Nvidia's excess EPS forecast ... and everyone's favourite bonds vs equities "jaws chart" (Chart 3) as financial conditions tighten, Mag 7 leadership comes under pressure, will the jaws close? After all, Mag7 was the only thing outperforming this year.. S&P493 was flattish…
Chart 3: S&P vs GS FCI
Source Nomura via ZeroHedge
Articles consumed from Harkster.com "Fed channel" ...
Calculated Risk - Fed Chair Powell "Inflation is still too high, expects "a period of below -trend growth"
FT - Fed chair pledges to move carefully on rates amid 'range of uncertainties'
Tim Duy's - Fed Watch
ZeroHedge - Fed Chair Powell Delivers Dovish Remarks
Federal Reserve - Powell, Opening Remarks
WSJ - Jerome Powell Signals Fed Will Extend Interest-Rate Pause
Theme 2 - Why are long - term interest rates rising?
As per page 33 of Apollo Academy October Outlook For Public And Private Market ... the answer is term premium. Torsten Slok's 10 downside risks to the US economic outlook is well worth a read.
Theme 3 - New content added to Harkster bespoke aggregator
If there is anything else you would like added, pls don't hesitate to get in touch ... hello@harkster.com.
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Some further reading and listening of note
Apricitas Economics (Joseph Politano) - Monetary Policy in a Surplus Economy
Reuters - Crypto Wire
Rest is Politics - Israel / Gaza What happens next?
Axios - GOP erupts in closed-door meeting after House speaker stalemate
Moontower #202 - I Tried To Buy TIPs And Failed
MacroVoices - Lyn Alden Broken Money
The Block - JPMorgan expects spot bitcoin ETF approvals to come 'within months'
Axios - US to send Israel artillery shells initially designated for Ukraine
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