Markets rise as yields fall on bets the Fed is done raising rates

Dow soared 385, advancers over decliners a hefty 8-1 & NAZ advanced 191.  The MLP index rose 3+ to the 248s & the REIT index jumped 10 to the 339s.  Junk bond funds remain in demand & Treasuries had very heavy buying, sharply reducing yields.  Oil is fractionally higher to the 81s & gold inched up 1 to 1898.

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The cost of labor unexpectedly declined in the 3rd qtr, providing at least some relief on the inflation front, the Labor Dept reported.  Unit labor costs, a measure of hourly compensation against productivity, fell 0.8% for the Jul-Sep period at a seasonally adjusted rate.  The forecast had been looking for a gain of 0.7%.  On a 12-month basis, unit labor costs increased 1.9%.  The breakdown reflected a 3.9% increase in hourly compensation, offset by a 4.7% rise in productivity.  That increase in productivity also was more than expected, beating the estimate for a rise of 4.3% for the biggest quarterly gain since the 3rd qtr of 2020.  Output climbed 5.9%, while hours worked rose 1.1%.  The developments come as the Federal Reserve is seeking to tamp down inflation through a series of interest rate increases.  Yesterday, Fed Chair Jerome Powell said wage gains “have really come down significantly over the course of the last 18 months to a level where they’re substantially closer to that level that would be consistent with 2% inflation over time,” the central bank's target.

Labor costs show surprise decline in the third quarter

The Treasury Dept recently dropped a financial bomb, announcing the deficit for fiscal year 2023 was $1.7T & it just released new numbers projecting borrowing of $1.6T in just the first ½ of fiscal year 2024.  As if the 23% growth in last year's deficit wasn't enough, the Treasury is now on track to borrow almost as much in just 6 months as it did in the previous 12.  That's nearly a doubling of the deficit.  It means the Treasury is on track to borrow over $3T this fiscal year, 50% more than previously estimated by the Congressional Budget Office.  Besides the pandemic in 2020, America has never run deficits like the previous, current, or next qtr, at $1T, $776B & $816B, respectively.  In the 4 qtrs that preceded the pandemic, the Treasury had an average deficit of under $300B, about ½ to 1/3 of today's levels.  Borrowing was much too high even before 2020.  But the fact that borrowing is now almost 3 times as high speaks volumes about how quickly things are spiraling out of control.  The federal gov's financial situation resembles a stereotypical bomb from a cartoon or cinema, spherical in shape with an impractically long fuse.  The long delay between the bomb being lit & exploding allows the incendiary to be thrown between people, none of whom want to be holding it when it goes off.  As the fuse gets shorter, people more quickly throw the bomb to someone else, & that's exactly what’s happening with Treasuries (bills, notes & bonds) today.  After the 1990s, the federal gov seemed to completely abandon the idea of a balanced budget, let alone paying off the debt.  Artificially low interest rates, courtesy of the Federal Reserve's monetary manipulations, allowed politicians of both parties to eventually rack up a federal debt that was larger than the economy but still required only small annual interest payments to service the debt.  Such irresponsibility is how a nation builds a fiscal bomb.  Bidenomics, perhaps best defined as the gov spending, borrowing & printing too much money, not only made the bomb larger, but also caused inflation, which forced up interest rates.  That was the match that lit the fuse.  Because the federal debt is $33.7T, just a 1% increase in yields adds $337B to the annual cost of servicing the debt over time, as more of the debt is rolled over at higher interest rates.  That adds to the administration's already large deficits, so that higher interest costs grow the debt even faster.  The Treasury is already spending an annualized $1T to service the debt.

The fuse on America's debt bomb just got shorter

Eli Lilly (LLY) reported 3rd-qtr revenue & adjusted earnings that topped estimates on strong demand for its diabetes drug Mounjaro, but slashed its full-year profit guidance due to charges primarily related to its recent acquisitions.  For the qtr ended Sep 30, LLY posted a loss of $57.4M (6¢ a share) compared with a profit of $1.45B ($1.61 a share) a year earlier.  Excluding one-time items, the company posted EPS of 10¢.  The pharmaceutical giant generated 3rd-qtr revenue of $9.5B, up 37% from the same period a year ago.  That increase was primarily driven by growth from Mounjaro & other treatments, including breast cancer pill Verzenio & diabetes medication Jardiance, & the sale of one of its drug portfolios.  The company recorded pretax “in-process research and development” charges of $2.98B, which are primarily related to a slew of recent buyouts, including Dice Therapeutics, Versanis Bio & Emergence Therapeutics.  That compares with charges of $62M in the 3rd qtr of 2022.  “This is essentially the future value of business development deals we have done,” CEO David Ricks said.  The company lowered its 2023 adjusted EPS guidance to $6.50-$6.70, from a previous range of $9.70-$9.90.  But LLY reiterated its full-year revenue forecast of $33.4-$33.9B.  Mounjaro, the company's Type 2 diabetes injection, posted $1.4B in sales for the qtr.  The drug was first approved in the US in May 2022 & had just $97.3M in sales in the year-ago period.  Analysts had expected the drug to bring in $1.3B in worldwide sales.  The lion's share of Mounjaro revenue came from the US, where it raked in $1.28B, reflecting increased demand & higher realized prices due to decreased use of savings card programs.  The stock surged 25 (almost 5%).
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Eli Lilly results top estimates on Mounjaro strength but slashes profit outlook

The Dow's grim performance was reversed in the last week (see below).  Risky investments (like stocks) are being welcomed.  Even if the rate hikes end, businesses still have to live with interest rates at very high levels & that is not good going forward.  Additionally, growing federal deficits are troubling.

Dow Jones Industrials

 

Markets climb after Fed leaves rates unchanged again

Dow went up 221, advancers over decliners 2-1 & NAZ gained 210.  The MLP index added 2 to 246 & the REIT index edged up 1+ to the 329s.  Junk bond funds were in strong demand after recent selling & Treasuries had more buying which reduced yields.  Oil slipped back under 81 & gold was off 10 to 1983 (more on both below).

AMJ (Alerian MLP Index tracking fund)

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The Federal Reserve again held benchmark interest rates steady amid a backdrop of a growing economy & labor market & inflation that is still well above the central bank's target.  In a widely expected move, the Fed’s rate-setting group unanimously agreed to hold the key federal funds rate at 5.25-5.50%, where it has been since Jul.  This was the 2nd consecutive meeting that the Federal Open Market Committee chose to hold, following a string of 11 rate hikes, including 4 in 2023.  The decision included an upgrade to the committee's general assessment of the economy.  The post-meeting statement indicated that “economic activity expanded at a strong pace in the third quarter,” compared with the Sep statement that said the economy had expanded at a “solid pace.”  The statement also noted that employment gains “have moderated since earlier in the year but remain strong.”  The GDP expanded at a 4.9% annualized rate in the 3rd qtr, stronger than even elevated expectations.  Nonfarm payroll growth totaled 336K in Sep, well ahead of the outlook.  There were few other changes to the statement, other than a notation that both financial & credit conditions had tightened.  The addition of “financial” to the phrase followed a surge in Treasury yields that has caused concern.  The statement continued to note that the committee is still “determining the extent of additional policy firming” that it may need to achieve its goals.  “The Committee will continue to assess additional information and its implications for monetary policy,” the statement said.  The decision to stay put comes with inflation slowing from its rapid pace of 2022 & a labor market that has been surprisingly resilient despite all the interest rate hikes.  The increases have been targeted at easing economic growth & bringing a supply & demand mismatch in the labor market back into balance.  There were 1.5 available jobs for every available worker in Sep, according to the Labor Dept.  Core inflation is currently running at 3.7% on an annual basis, according to the latest personal consumption expenditures price index reading, which the Fed favors as an indicator for prices. While that has decreased steadily this year, it is well above the Fed's 2% annual target. The post-meeting statement indicated that the Fed sees the economy holding strong despite the rate hikes, a position in itself that could prompt policymakers into a prolonged tightening stance.  In recent days, the “higher-for-longer” mantra has become a central theme for where the Fed is headed.  While multiple officials have said they think rates can stay where they are as the Fed assesses the impact of the previous increases, virtually none have said they are considering cuts anytime soon.  Market pricing indicates the first cut could come around Jun 2024, according to CME Group data.  The restrictive stance has been a factor in the surging bond yields.

Fed holds rates steady, upgrades assessment of economic growth

US job openings rose more than expected for the 2nd month in a row as the labor market remains surprisingly resilient in the face of the Federal Reserve's aggressive interest-rate hike campaign.  The Labor Dept said there were 9.6M job openings in Oct, an increase from the downwardly revised 9.5M openings reported the previous month.  The forecast expected a reading of 9.2M.  The Federal Reserve closely watches these figures as it tries to gauge labor market tightness & wrestle inflation under control.  The higher-than-expected figure indicates that demand for employees still outpaces the supply of available workers.  The central bank has responded to the inflation crisis & the extremely tight labor market by raising interest rates at the fastest pace in decades.  Officials have so far approved 11 rate hikes, lifting the federal benchmark funds rate to the highest level since 2001.  Policymakers have signaled that an additional rate hike is on the table this year if economic data points to a resurgence in price pressures.  The latest jobs data could give policymakers more space to hike rates & hold them at elevated levels for longer.  The uptick in vacancies last month largely stemmed from bars & restaurants as well as arts, entertainment & recreation services, according to the report.  Job openings remain historically high.  Before the COVID-19 pandemic began in early 2020, the highest on record was 7.6M.  There are roughly 1.5 jobs per unemployed American.

Job openings unexpectedly rise for second straight month

Netflix (NFLX) said its cheaper, ad-supported tier has amassed 15M global monthly active users.  That's triple the most recent figure, disclosed in May & notable growth for NFLX as it laps a year since rolling out the new subscription option.  The streaming giant introduced its ad-supported plan alongside a password-sharing crackdown in an effort to drive revenue amid slowing subscriber growth.  The move has proved fruitful so far.  In its 3rd-qtr report, NFLX said it added 8.8M subscribers, more than expected, & that it expects a similar bump in subscriber growth in the 4th qtr.  Newly instated Pres of Advertising Amy Reinhard said that advertisers can now choose to run 10-, 20-& 60-second ads, in addition to the 15- & 30-second spots offered.  The move will allow advertisers “around the world multiple formats to leverage,” Reinhard added.  Members of the ad tier can also expect some new features coming their way.  NFLX said it will roll out higher 1080p streaming resolution for ad tier users in addition to 720p.  Users will also be able to download movies & series to their devices starting at the end of this week.  The stock went up 8.50.
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Netflix ad-supported tier has 15 million subscribers, triple the previous count

Gold futures settled with a loss, then moved a bit higher in the electronic trading shortly after the Federal Reserve announcement.  The central bank agreed to leave its benchmark fed funds rate unchanged at 5.25-5.50%, while also keeping the option open for a further interest-rate hike.  The Federal Open Market Committee decision, albeit not raising rates, is a bit hawkish as they raised economic growth numbers.  Strong labor & inflation data is going to support the higher-for-longer; mantra the Fed is communicating.  Although this would be seen as negative for gold, the FOMC also mentioned tighter financial conditions as a risk.  Dec gold was at $1988 an ounce shortly after the Fed announcement.  That follows a settlement at $1987 an ounce, down $6 for today's session.

Gold Prices Settle Lower, Edge Up After The Fed Statement

West Texas Intermediate (WTI) crude closed with a 3rd-straight loss, surrendering early gains as worries over a widening Middle East war faded & US inventories rose.  WTI crude for Dec closed down 58¢ to settle at $80.44 per barrel, the lowest in 2 months, after trading as high as $83.52 earlier in the session.  Jan Brent crude, the global benchmark, was last seen down 34¢ to $84.68.  The drop came as traders again lowered the war-risk premium again, while the Energy Information Administration's weekly survey showed US oil inventories rose by 0.8M barrels last week while US oil production is at a record 13.1M barrels per day.  The fading war premium comes despite yesterday's bombing of a Gaza refugee camp was condemned by other Middle East countries as it targeted a senior Hamas commander & a tunnel network beneath the camp, but the opening of a passage from Gaza into Egypt for foreigners & some Palestinians eased concerns.

WTI Closes Lower, Surrenders Early Gains as War Fears Fade and US Inventories Rise

Dow rose after Powell's comments following the meeting.  The rise was good but less than impressive.  While safe haven gold was sold, Treasuries had a lot of buying today.  Dow bounced off its latest low although many negative factors for stocks remain.

Dow Jones Industrials 

Markets extend gains ahead of the Fed's decision

Dow climbed 183, advancers over decliners better than 2-1 & NAZ was up 104.  The MLP index added 1+ to the 246s & the REIT index was steady in the 327s after yesterday's rise.  Junk bond funds were also in demand & Treasuries saw heavy buying which lowered yields.  Oil rebounded 1+ to the 82s & gold was up 3 to 1997.

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Hiring by US companies increased less than expected in Oct, the latest sign that the labor market is starting to cool in the face of higher interest rates, according to the ADP National Employment Report.  Companies added 113K jobs last month, below the 150K gain that was predicted but higher than the unrevised 89K increase recorded in Sep.  The weaker-than-expected report comes in the wake of an aggressive tightening campaign by the Federal Reserve, which has hiked rates to the highest level since 2001.  Fed officials, including Chair Jerome Powell, have opened the door to at least one more hike this year, & have signaled that rates will remain elevated for longer as they assess whether high inflation has retreated for good.  In a potentially welcoming sign for the Fed as it tries to wrangle inflation under control, wages continued to moderate in Oct.  Annual pay rose 5.7% last month, the 13th straight month of slowing growth, according to the report.  For workers who switched jobs, wages climbed 8.4%, down from 9% the previous month.  "No single industry dominated hiring this month, and big post-pandemic pay increases seem to be behind us," said Nela Richardson, ADP chief economist.  "In all, October’s numbers paint a well-rounded jobs picture. And while the labor market has slowed, it’s still enough to support strong consumer spending."  The education & health services industry drove the biggest job gains last month, adding 45K new employees.  But hiring was largely broad-based last month & there were also notable gains in other sectors including leisure & hospitality, financial activities & trade, transportation & utilities.

Private sector job growth increases less than expected in October: ADP

The Treasury Dept announced plans to accelerate the size of its auctions as it looks to handle its heavy debt load & with financing costs rising.  In a development getting close attention, the dept detailed its refunding plans for future debt sales.  The announcement comes with Treasury yields around their highest levels since 2007, a reflection of financial markets spooked over how much damage higher borrowing costs could exact.  Most immediately, the Treasury will auction $112B in debt next week to refund $102B of notes set to mature Nov 15, raising more than $9B in extra funds.  The dept said it will increase the auction size of various maturities, focusing more on coupon-bearing notes & bonds.  The Treasury will maintain its current auction size for bills until late Nov, when it expects to have its general account replenished enough to implement “modest reductions” thru mid- to late-Jan.  On Mon, the dept said it would need to borrow $776B in the current qtr & $816B in the first qtr of calendar 2024.  The auction changes are important to investors because they could provide a window into where yields are heading.  Markets have been concerned about whether there will be enough demand to meet the Treasury's needs, which would send yields up even further & possibly cause financial distress.  However, most auctions have been fairly well subscribed of late, though yields are still around their highest levels since 2007, the early days of the global financial crisis.

Treasury details plans to step up size of bond sales to manage growing debt load and higher rates

As mortgage rates hover near the highest level in more than 2 decades, homebuyers are turning to riskier mortgage products to help them get into a home.  Last week, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726K or less) decreased to 7.86% from 7.90%, with points falling to 0.73 from 0.77 (including the origination fee) for loans with a 20% down payment, according to the Mortgage Bankers Association (MBA).  That is still 80 basis points higher than the same week one year ago.  Adjustable-rate mortgages, which are considered riskier because the rates are fixed for shorter terms, offer savings.  The average contract interest rate for 5/1 ARMs decreased to 6.77% last week.  “As higher rates continue to impact affordability and purchasing power, ARM loans increased almost 10 percent last week and continued to gain share, growing to 10.7 percent of all applications,” said Joel Kan, an MBA economist.  The ARM share of mortgage applications is now at the highest level in nearly a year.  Overall, mortgage demand, however, continues to slide.  Applications to refinance a home loan fell 4% for the week, seasonally adjusted, & were 12% lower than the same week 1 year ago.  Applications for a mortgage to purchase a home dropped 1% for the week & were 22% lower year over year.  “The impact of higher rates continued to be felt across both purchase er.and refinance markets. Purchase applications decreased to their lowest level since 1995 and refinance applications to the lowest level since January 2023,” Kan added.

Adjustable-rate mortgage demand jumps nearly 10% as buyers struggle to afford housing market

Investors expect the Federal Reserve to keep rates even as economic data leaves open the possibility of future hikes.  The Oct report for hiring in Oct is bland, not signalling any changes from expectations.   Powell's comments will drive the stock market later today.

Dow Jones Industrials