Looks like investors sobered up over the weekend, realizing that inflation is remaining high. The 10-yr UST nominal and real yields are up ~16bps and ~9bps from their respective lows last week. So, bond prices are down. Both the Sep CPI and PPI data confirmed a renewed inflation impulse. 42Macro is forecasting that the Fed won’t be able to get inflation down to 2% before a recession. Friday’s U of M Consumer Inflation Expectations flagged that consumers are going to want higher wages to deal with the sticky inflation. So, what does that say for corporate profits? Not sure if we’ll see it here in 3Q23 Q&A or not, but eventually demand goes down when prices are too high, and profits erode when labor demands more of the pie. Corporates have been getting more than their fair share of pie in the past decade. A chart per BBG/UBS:
Although the overall S&P has increased by +12.7% this year, only 5 of the 11 sectors have a positive return YTD. Unsurprisingly, the 3 related to tech are the key drivers (the vast majority of pie). To note, the equal weighted benchmark has accordingly sunk -0.7% (no pie). The Russell is down -2.4% (no pie).
The tug of war continues, and only one can be right. Bulls are focused on the recent dovish shift in Fedspeak, solid bank prints, a strong labor market and the promise of consumer resilience driving a soft-landing, ok fund flows, and seasonality (Santa Claus Rally around the corner?). Bears are focused on the bond yield backup, lagged effects of Fed tightening (and potential further hikes), sticky inflation, growth headwinds, market return (see Unequal Slices) concentration, depressed ERP, and continued geopolitical tensions.
Verdad printed a solid piece this morning about the disconnect between bankruptcies (increasing) and high yield spreads (4.4% instead of an expected 7.0%). They point to the private credit market as the lender to lower-quality borrowers most likely to default. Moody’s historically warned that this loan market is not rated by credit agencies and is more difficult to track, equating to an estimated $1trn+. So, there is risk in the system that could flare up expectedly, akin to pie in the face. So, watch the trend in GDP…
Per the NY Times, Israel is preparing to invade the Gaza strip, capture Gaza city and destroy Hamas’s leadership. Per Axios, Iran warned Israel it will intervene if its ground operation in Gaza continues. So, of course, Reuters is reporting that the US is warning Iran not to get involved in the crisis in Israel. So, the existing war and loss of life could escalate and involve more parties in short-order. So, we need leaders to strategically shepherd this situation. Not sure if Biden’s trip is going to help or hurt.
Owning a home as American as apple pie? Not right now. The pop in mortgage rates has driven widest gap between the cost of buying and cost renting a house since 2015, per Bloomberg.
Bloomberg is warning that the bond market increasingly is dependent on price-sensitive buyers demanding big premiums to finance even bigger deficits. Take note, folks. Bloomberg is reporting that bond market volatility is exceeding equity market volatility by the greatest level in at least 18 years. Where is this headed, especially since your ave Wall Street trader probably hasn’t been even working that long.