Market Commentary
October 09, 2023
Today is a federal holiday which might be a good thing as it was another tough week in the bond market last week. The yield on the 10yr Treasury shot up again closing at 4.795 which are levels we haven’t seen since around the financial crisis. The “why” is still a broken record as more fuel was added to the labor market fire in the form of much higher job openings and strong momentum in payrolls, the Fed continuing to reduce its balance sheet, and as some would put it “irresponsible” deficit spending. Congress is spending so much the central bank may be forced to print money to finance all of it (or they could raise taxes). It’s called debt monetization and it increases inflation which is certainly a headwind for the Fed.
The probability of another 25bp rate hike rose 10% from last week based on the futures market. Even with higher rates, we continue to hit all-time highs in debt. Household debt is now over $17T (that’s a T for trillion)! The average consumer housing expense is right around $3k per month which is also an all-time high. With a strong job market and wage growth (although easing a little lately) this year, these probably shouldn’t be too surprising. Home prices peaked in July 2022 before declining through January 2023. Since then home prices reversed and now have fully erased those declines (on a national basis). That’s a positive for those needing to extract equity, albeit at higher rates.
The 10yr weekly average for last week is 4.75 which means expected rates will be up another eighth of a point this week. One of my favorite market quotes is “the bigger the party, the bigger the mess the next day”. We had a big party for a long time prior to 2022 and we are still cleaning up the mess, but that works in reverse as well. This has been a prolonged tightening cycle with a lot of pent-up demand and when we come out of it (we will eventually, even if it is tough to see a path right now), I think we may have a good party. I can’t wait to get the invite…
Have a great week!