Markets waver on fluctuating Treasury yields

Dow was up 77, advancers over decliners nearly 2-1 & NAZ gained 37.  The MLP index rose 2+ to the 248s & the REIT index added 1+ to the 336s.  Junk bond funds traded higher following recent selling & Treasuries had more selling, raising yields (more below).  Oil slid back under 77 & gold dropped another 12 to 1878.

AMJ (Alerian MLP Index tracking fund)

 

 

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The 10-year Treasury touched a fresh 15-year high after the latest economic data showed continued resilience in the labor market.  The yield on the benchmark 10-year note rose more than 2 basis points to 4.647%.  Earlier in the session, the 10-year yield reached 4.688%, the highest level going back to 2007 when it yielded as much as 4.719%.  The yield on the 2-year Treasury fell more than 4 basis points to 5.096%.  Yields & prices move in opposite directions & 1 basis point equals 0.01%.  Weekly initial jobless claims came in lighter than expected, signaling continued strength in the labor market.  Initial filings for unemployment benefits totaled 204K for last week according to the Labor Dept.  The estimate anticipated a total of 215K.  The prospect of continuing inflationary pressures & rates staying elevated for longer has prompted renewed fears about a potential recession.  Investors will be paying close attention to data that may provide an indication of the state of the economy & scan today & tomorrow comments from Fed officials for clues about the economic expectations of policymakers.

10-year Treasury yield touches fresh 15-year high

For many Americans, Oct is a time for seasonal decorating & pumpkin spice lattes.  This year, it also marks the resumption of student loan payments at a point when US households are already struggling to make ends meet amid high inflation & higher interest rates.  And yet, just as Ms of borrowers face their first student loan bill in more than 3 years, Oct is expected to be a particularly big month for holiday shopping, as well, with consumers planning to start earlier & spend more than before.  Those competing forces “create a battle for consumer spending,” said Nick Handrinos, vice chairman & leader of Deloitte LLP's retail & consumer products practice.  This year, ½ of shoppers plan to begin their holiday shopping by Halloween, according to a recent Bankrate report.  A separate study, by RetailMeNot, found that more shoppers are starting even earlier than before — with as many as 64% kicking off the season in Oct, up from 53% in 2022.  With more shoppers getting an early start on the season, holiday retail sales are likely to increase 3.5-4.6% in 2023, according to Deloitte's annual forecast.  “We expect healthy employment and income growth to keep the volume of sales growing for the 2023 holiday season,” said Daniel Bachman, Deloitte's US economic forecaster.  And despite predictions that people are shopping earlier to take advantage of sales & spread out their holiday expenses, research from Morning Consult found that early shoppers are splurging, not saving.

Holiday shoppers are getting an early jump on the season, but student loan payments weigh heavily 

United Auto Workers (UAW) strikes at more plants belonging to General Motors (GM), Stellantis (STLA)& Ford (F) could reportedly come tomorrow, depending on the status of negotiations.  More automaker sites seeing strikes will depend on whether talks between the union & the automakers do not take a significant step forward said an unnamed source.  In the event of insufficient progress, the new strikes would reportedly 2 hours after the locations where they would take place get unveiled.  The 10M announcement of the new sites that are planned to be affected will come from the leader tomorrow.  The union posted on social media yesterday that its pres, Shawn Fain, would give a "stand-up announcement" at 10 AM  tomorrow.  "Our focus continues to be on bargaining in good faith with the UAW leadership to reach an agreement as quickly as possible that rewards our employees and allows GM to succeed and thrive into the future," a spokesperson for GM said.  The union is seeking pay raises amounting to 40% over a new 4-year contract as well as expanded benefits & other provisions.  The offers from the automakers, meanwhile, have come in closer to 20%, which includes a 10% hike that would become effective immediately.

GM, Ford, Stellantis could reportedly see more UAW strikes this week

The stock market continue to struggle as it faces so many headwinds.  Sorry about the problems with typeface today.

Dow Jones Industrials

 

Markets hesitate as yields and oil continue to rise

Dow retreated 68, advancers over decliners about 5-4 & NAZ went up 29.  The MLP index rose, along with oil, 3+ to the 246s & the REIT index slid back 2+ to the 335s.  Junk bond funds were weak & Treasuries saw selling which raised yields.  Oil soared 3+ on lower inventories to the high 93s & gold sank 24 to 1895 (more on both below).

AMJ (Alerian MLP Index tracking fund)

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A key measure of home-purchase applications dropped again last week as consumer demand cooled sharply amid a recent surge in mortgage rates.  The Mortgage Bankers Association's index of mortgage applications fell 1.3%.  The data also showed that the average rate on the popular 30-year loan climbed to 7.41% from 7.31% the previous week, the highest level since 2000.  By comparison, just one year ago, rates hovered around 5.65%.  "Mortgage rates moved to their highest levels in over 20 years as Treasury yields increased late last week," said Joel Kan, MBA's deputy chief economist.  "Based on the FOMC’s most recent projections, rates are expected to be higher for longer, which drove the increase in Treasury yields."  The steeper rates weighed heavily on housing demand, with applications for a mortgage to purchase a home sliding 2% for the week & application volume is down 27% compared with the same time last year.  Demand for refinancing also continued to fall last week, sliding another 1%, according to the survey.  Compared with the same time last year, refinance applications are down 21%.  "Both prospective homebuyers and homeowners continue to feel the impact of these elevated rates," Kan said.  "Many homeowners have little incentive to refinance."  Officials signaled during their policy-setting meeting last week that another rate hike is on the table this year & that rates are likely to remain elevated for some time.  Not only are higher mortgage rates dampening consumer demand, but they are also limiting inventory.  That is because sellers who locked in a low mortgage rate before the pandemic have been reluctant to sell with rates continuing to hover near a 2-decade high, leaving few options for eager would-be buyers.

Mortgage rates surge to 23-year high, rapidly cooling demand

As the United Auto Workers' strike against Ford (F), General Motors (GM) & Stellantis (STLA) moves thru its 2nd week, the economic effects are beginning to ripple thru the automakers' vast supply base.  While the automakers & their larger Tier 1 suppliers likely have the resources to weather an extended work stoppage, there's a network of smaller suppliers that could be hit hard by a prolonged strike, or even go out of business entirely.  That network includes about 5600 companies, most in the upper Midwest, that provide seats, suspension components, wiring harnesses & thousands of other parts used in brand-name vehicles.  It's substantial, employing an estimated 871K workers, according to the American Automotive Policy Council.  Those smaller suppliers have only recently recovered from the shocks of the Covid-19 pandemic & the resulting global shortage of semiconductors.  Now, they're coming under pressure to increase their own workers’ wages, in an environment where higher interest rates have made it more costly to borrow money, & staring down the threat of ongoing auto workers' strikes.  “We represent a lot of suppliers that are very, very concerned about where this is going,” said Dennis Devaney, a Detroit attorney who has represented both GM & Ford & who once served as a board member for the National Labor Relations Board.  Devaney noted that some suppliers are still struggling with supplies of semiconductors & other components, in part because their Chinese counterparts are still recovering from Covid-related shutdowns & other logistical issues since the global health crisis.  “The last thing they need from an economic perspective is a strike by the UAW,” he said.  Some of the small suppliers may only be able to hold out a few weeks if the automaker factories they support are struck.  Harbour Results, a manufacturing advisory firm near Detroit, estimates that about 30% of those smaller suppliers were in poor financial shape, or “unbankable” in Harbour's view, as of the end of 2022, with another 21% characterized as struggling. 

UAW strikes threaten already vulnerable auto parts suppliers

Amid high inflation & rising interest rates, most Americans believe the economy is in bad shape, according to a poll from Quinnipiac.  71% of Americans described the economy as either not so good or poor & 51% said it's getting worse, the survey said.  However, 60% of Americans said their financial situation was either excellent (10%) or good (50%).  But whether they have healthy wallets, the conditions of the economy take priority for Americans when determining whom to vote for in the next presidential election.  When registered voters were given a list of 8 issues & asked to rank the most important ones in deciding who to elect pres, 32% cited the economy.  That was followed by preserving democracy (28%).  "If democracy is the complex engine that guides the country’s future, it’s clear a vast majority of Americans now fear a catastrophic breakdown is possible," Quinnipiac University Polling Analyst Tim Malloy said.  Despite the state of the nation, inflation remains a global concern.  On a world scale, 37% of respondents cited inflation as their main concern in Aug, according to the latest data from the What Worries the World Survey by Ipsos.  Inflation increased to 3.2% in Jul, according to the latest consumer price index (CPI) data released by the Bureau of Labor Statistics (BLS).  The year-over-year spike was primarily driven by the costs of housing which increased 7.7%.  At the same time, the food away from home index rose to 7.1% & the index for food overall climbed to 4.9%.  With inflation still sitting above the Federal Reserve's target range, the central bank could deliver another interest rate hike in its Sep meeting.  In addition, Fed officials have expressed that they are not softening their tightening on monetary policy until it's clear they are within reach of meeting their goals.

Most Americans see the economy in bad shape and getting worse

Gold closed at a 6-month low as treasury yields rose & the $ continues to strengthen.  Gold for Dec closed down $28 to settle at $1890 per ounce, the lowest since Mar 10.  The price of the metal has dropped 3.9% over the past week after the Federal Reserve indicated it expected to hike interest rates once more prior to the end of the year & is likely to keep rates high for longer than expected.  The hawkish outlook has boosted the $ & treasury yields, bearish notes for gold.  Still, weak equity markets are offering some support for the precious metal as investors move to its safe haven.  The ICE dollar index was last seen up 0.53 points to 106.76, after earlier touching 106.84, the highest since Nov.

Gold Falls to a Six-Month Low as the Dollar and Treasury Yields Move Higher

West Texas Intermediate (WTI) crude oil closed at the highest in 13 months  as traders focus on supply concerns as US inventories fell last week.  WTI crude for Nov closed up $3.29 to $93.68 per barrel, the highest since Aug 24, 2022, while Nov Brent crude, the global benchmark, settled up $2.59 to $96.55.  In its weekly survey, the Energy Information Administration reported US oil inventories, fell by 2.2M barrels last week, more than the 0.32M barrel drop estimate & countering a report yesterday from the American Petroleum Institute showing stocks rose by 1.59M barrels last week.  Supplies at the Cushing, Oklahoma, storage hub, the pricing point for the WTI contract, also fell, dropping 0.94M barrels to 21.96M barrels, the lowest since Jul 2022.

WTI Crude Oil Rises to a 13-Month High on Tight Supplies, Lower US Inventories

The Dow chart below looks cheerless in the last 2 months.  There is not much else to say.  High interest rates along with higher oil prices will be a significant drag on the economy & there is no quick fix.

Dow Jones Industrials 

Markets slide as yields and oil move higher

Dow fell 65, advancers ahead of decliners by about 2-1 & NAZ edged up 15.  The MLP index rebounded 2+ to the 245s & the REIT index was roughly even in the depressed 337s.  Junk bond funds fluctuated & Treasuries saw a little selling with yields roughly flattish (more below).   Oil jumped 2+ to the 92s after a fall in US crude inventories & gold dropped 18 to 1901.

AMJ (Alerian MLP Index tracking fund)

 

 

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The federal gov is facing a potential gov shutdown that could begin this weekend barring action by Congress & if it occurs, rating agency Moody's & the US credit rating could be negatively impacted.  Moody's cited past brinksmanship over the debt limit as well as a dysfunctional budgeting process in Congress as weaknesses compared to other countries that hold Aaa ratings, which is the agency's highest rating tier.  The report emphasized a lack of medium-term fiscal planning, demonstrated by Congress routinely failing to approve an annual budget, as well as limited flexibility due to high spending on mandatory entitlement programs & rising borrowing costs.  "A shutdown would be credit negative for the U.S. sovereign," the team of sovereign risk analysts led by Moody's Investors Service senior VP William Foster wrote.  "While government debt service payments would not be impacted and a short-lived shutdown would be unlikely to disrupt the economy, it would underscore the weakness of U.S. institutional and governance strength relative to other Aaa-rated sovereigns that we have highlighted in recent years."  "In particular, it would demonstrate the significant constraints that intensifying political polarization put on fiscal policymaking at a time of declining fiscal strength, driven by widening fiscal deficits and deteriorating debt affordability," Moody's noted.  The analysts went on to say that "debt affordability is by far the most indicator we use in assessing the sovereign’s overall fiscal strength, due to the U.S.’ preeminent global reserve currency status and capacity to sustainably carry higher levels of debt than most countries."  The yield on the 10-year Treasury note rose as high as 4.548% on Mon, its highest level in 15 years.  Higher interest rates mean that the gov will incur higher costs from servicing the $33T national debt.  In Aug, the Congressional Budget Office noted that interest payments on the national debt rose by $149B compared to a year ago because of higher interest rates.  "At this stage, Congress’ consistent inability to agree on annual budgets and pass appropriations funding suggests that it is unlikely that successive government will be able to implement fiscal measures that will materially slow the expected decline in debt affordability," Moody's wrote.  Moody's currently rates the US gov "Aaa" with a stable outlook, which is the highest level of creditworthiness it assigns to borrowers in its rating process.  It's the last major rating agency to keep the US at its highest credit tier after its 2 peers downgraded the federal gov's credit rating during past fiscal standoffs.

Moody's warns of how government shutdown could affect US credit ratings

Consumer confidence fell again in Sep as Americans expressed greater concern that the economy could be headed for a recession.  Consumer confidence fell again in Sep as Americans expressed greater concern that the economy could be headed for a recession.  Confidence remains well below a post-pandemic peak of 128.9 in Jun 2021, as consumers continue to grapple with high inflation, rising interest rates & recession fears.  The Expectations Index indicating consumers' short-term optimism for the economy also fell for a 2nd straight month in Sep, dropping to 73.7 from 83.3 in Aug.  Historically, when the index drops below 80, it signals a recession within the next 12 months, the think tank said.  The proportion of respondents who said a recession is "somewhat" or "very likely" rose in Sep, after declining in Aug.  "Write-in responses showed that consumers continued to be preoccupied with rising prices in general, and for groceries and gasoline in particular," Conference Board chief economist Dana Peterson said.  "Consumers also expressed concerns about the political situation and higher interest rates," Peterson continued.  "The decline in consumer confidence was evident across all age groups, and notably among consumers with household incomes of $50,000 or more."  The findings also pointed to signs of rising concerns about current household finances.  The share of consumers who said they were in a "good" situation fell & the proportion citing "bad" conditions increased.

US consumer confidence drops for second straight month, recession fears rise

Treasury yields were little changed, with the yield on the 10-year Treasury coming down from the fresh 15-year high it hit yesterday.  The 10-year Treasury yield was little changed at 4.556%.  It had risen as high as 4.566% yesterday, its highest level since 2007.  kliThe 2-year Treasury  yield edged slightly higher, adding 1 basis point to 5.087%.  Yields & prices have an inverted relationship & 1 basis point equals 0.01%.   The Commerce Dept reported that orders for durable goods rose 0.2% in Aug, topping the 0.5% decline expected.  Investors considered the state of the economy as various key data points missed forecasts yesterday.  Both Aug's new home sales & Sep's consumer confidence index came in below estimates.  That comes as the Federal Reserve suggested last week that interest rates would go higher still & remain elevated for longer, prompting concerns among investors about what it could mean for the economy.  Elsewhere, concerns continued over a potential US gov shutdown, which could begin as early as Oct 1 unless Congress agrees on a deal to fund the federal gov before then.  A shutdown could negatively affect the US' credit rating.  Moody's rating agency warned earlier this week, while Wells Fargo noted that it could lead the dollar index to decline.  Pres Biden yesterday called on Congress to resolve the issue.

10-year Treasury yield pulls back from more than 15-year high

This is a scary time for investors.  Another credit rating is looming & that has the potential to raise interest rates further.  Meanwhile interest rates are already high, there is a major strike & oil keeps rising.  It appears that nobody is charge of the country's affairs.  The VIX (uncertainty index) is almost 19, near a 4 month high.  Not Good!!

Dow Jones Industrials