Market Commentary
October 02, 2023
It has been a couple of weeks since the last market commentary which happened to be a FOMC week. As expected, the Fed did not move rates at their September 20th meeting. Heading into that week, the 10yr was at 4.31. Two weeks later we are looking at 4.617 which is a substantial increase in treasury yields. It would seem the opposite would occur with the Fed choosing not to hike rates and signals that there is likely only one more quarter point rate hike in the future. The Fed may not have to raise at all if the core PCE inflation continues its trend lately (showing 3.9% on 12 month basis and 2.2% over last 3 months annualized) which is welcome news for the Fed.
So why the big increase in long term yields? I think a couple of the large reasons we have seen increased pressure on yields lately are things I have mentioned previously. The labor market remains extremely tight. Over the past couple of weeks, jobless claims decreased and the unemployment rate remains unchanged. The Fed also decreased its balance sheet by selling a whopping $75B in bonds recently (remember, Fed selling bonds causes yields to rise). Oil has also risen a lot recently to over $92 a barrel last week (up 40% in the last 4 months). I am sure some of you have seen triple digits at the pump recently. Oil is a key inflation driver and will keep the Fed on their toes. Powell said numerous times the FOMC needs to “proceed carefully” and it still looks like rates will be higher for longer. So long term rates continue to play catch up to short term rates since short term rates aren’t likely to come down anytime soon. See the futures table below that is now predicts quantitative easing will be pushed out to June of next year. Furthermore, the market only anticipates a 50-75bp decrease in rates by the end of 2024.
The looming government shutdown has been temporarily averted with an 11th hour 45-day continuing resolution that was passed on Saturday. Hard to say what, if any impact these shutdowns have on the bond market, but historically it adds to government costs and deals that lead to higher spending (which we have plenty of already). There is also the potential to delay economic data the Fed relies on for policy making, so hopefully we don’t revisit this again in November.
Have a great week!