by Bryan Perry
October 3, 2023
For Wall Street professionals and private investors alike, last weekend marked “good riddance” to the month of September, where broad selling pressure weighed on both stocks and bonds. It was a time to be long oil and oil-related stocks, floating-rate debt, and the U.S. dollar. Not much else was working.
Hopefully, October and the ushering in of third-quarter earnings season will help to shift sentiment into a more bullish tone, but there are some large unresolved issues that could keep the market on the defensive.
At the top of the list of ongoing concerns is Fed monetary policy, specifically the recent change in the Fed’s outlook for the next year. The market had been expecting the Fed to leave rates unchanged at current levels, through May-July 2024, and then begin to reduce the Fed Funds rate by 100 basis points by January 1, 2025. After the September 20 meeting, the market now believes the Fed will hold rates where they are for longer, and maybe have room for cuts of up to 50 basis points by the back-end of next year.
This sudden shift in thinking unglued the bond market, sending yields on the benchmark 10-year Treasury Bond from 4.37% to nearly 4.70% in the span of just a few days and put the kibosh on any notion of a bullish window-dressing quarter-ending rally. That, and seeing WTI crude oil briefly trade up to $95 per barrel raised the specter of a hot read from the Personal Consumption Expenditures (PCE) index released last Friday. True, it did reflect higher food and energy prices on the headline number of 0.4%, but it also showed core inflation (ex-food and energy) trending still lower for August, with a net gain of only 0.1%.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
As of Sunday October 1, the closely monitored CME Fed Watch Tool showed an 81.7% probability of the Fed keeping the Fed Funds rate at 5.25%-5.50% at the November 1 FOMC meeting and a 64.8% probability of no rate hike for the last FOMC meeting, scheduled for December 13. At the same time, Citigroup CEO Jane Fraser said that she expected the Federal Reserve to raise interest rates in November but hopes there is no need for another hike. I believe her comment is simply out of touch with reality.
The Fed Watch Tool uses the prices of fed funds futures, contracts on the CME to project the real-time probability of federal funds rate changes. The Fed Watch Tool implies that the Fed is done with rate hikes. But that doesn’t guarantee lower bond yields are on the horizon. At the CNBC Delivering Alpha Investor Summit, hedge fund manager Bill Ackman was again “talking his book,” where he is short Treasuries via options, so as to avoid paying interest on being short the physical bonds. “I would not be shocked to see 30-year rates through the 5% barrier, and you could see the 10-year approach 5%.”
At the same conference, hedge fund manager David Tepper said, “It’s not complicated right now. You’re just not in QE (easing) times anymore. You’re in the QT (tightening) era. It’s a higher rate environment. Can’t be the same multiples as before. It’s not bad. It’s just different.” Tepper noted that he hasn’t sold anything in his portfolio, and includes five of the Magnificent Seven stocks as top portfolio holdings. (Interestingly, his latest trade was buying a 6-month CD, paying 6.0%.)
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Oddly enough, the relief from Friday’s rather tame inflation report lasted all of about one hour. The market opened Friday only to see selling pressure return as reports of an expanded auto strike and a possible government shutdown crossed the tape. Congress avoided the shutdown by finally passing a short-term spending bill on Saturday that expires in 45 days, but both parties remain widely divided on appropriations for Ukraine, border security and how to deal with the national debt, now at $33 trillion.
Ray Dalio, the founder of hedge fund Bridgewater Associates, stated in an interview with CNBC’s Sara Eisen, aired last Thursday, “We’re going to have a debt crisis in this country.” Their fireside chat at the Managed Funds Association continued when Dalio said, “How fast it transpires, I think, is going to be a function of that supply-demand issue, so I’m watching that very closely.”
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The whole world is watching how our leaders address this rising debt problem. What they are watching is the Fed trying to shrink their $8.7 trillion balance sheet while Congress passes huge spending bills, lifting the debt ceiling on a constant basis. They are watching soaring lawlessness in some of America’s largest cities. They are watching a crisis at the southern border, a failing energy policy and major dysfunctions within Congress, reflecting a vacuum of leadership. Only 19% of Americans approve of the job Congress is doing, with 82% supporting term limits, including 89% of Republicans and 76% of Democrats.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
My point here is that while the Fed may be focusing on getting the rate of inflation down toward their 2% target, that doesn’t necessarily mean that Treasury yields across the longer end of the curve will come down in tandem with any Fed Funds rate cuts the Fed may make next year. The Fed could lose control of the long end of the curve if buyers of Treasuries demand a higher return to compensate for the risk of a soaring debt-to-GDP ratio, excessive spending, possible government shutdowns and culture wars.
At some point, probably sooner than later, our elected officials on Capitol Hill must deal with getting our fiscal and social houses in order, or those record bond auctions being held every week won’t go so well.
All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Crude Oil Prices Reach a 13-Month High
Income Mail by Bryan Perry
Lower Inflation May Not Mean Lower Treasury Yields
Growth Mail by Gary Alexander
The Fourth Quarter Explosion is About to Start
Global Mail by Ivan Martchev
The Selloff in Stocks is the Fed’s Fault
Sector Spotlight by Jason Bodner
October – the Good News and the Bad News
View Full Archive
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Bryan Perry
SENIOR DIRECTOR
Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.
Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry
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