Market Commentary
November 05, 2023
Last week was a good week for us in the bond market. Equities rallied hard as well. This was a combination of economic data, Fed commentary and Treasury auction news that snowballed on each other. The 10 year, which was over 5% intraday the previous week, closed at 4.577.
As far as the data goes, it was a pretty heavy week. We started with Case Shiller home prices posting their 7th month in a row of gains and the only modest unfavorable news. Consumer confidence was softer then expected and employment costs, while slightly higher then expected, continue to decline. Initial jobless claims still remain low, but continued to increase. Productivity showed a larger than expected gain while labor costs declined a little bit. Moving to the Employment report, payrolls were softer than expected and the unemployment rate inched up a little. Finally the ISM report which measures manufacturing or product demand softened more than expected in October most notably in the services sector (largely a discretionary sector that consumers scale back on first). Nothing was too earth shattering, but the combination of all the data was good news for the Fed and a sign the economy is moving in the right direction.
On Wednesday, prior to much of the economic data above being released, the Fed met and left rates unchanged which was pretty much a foregone conclusion. Powell made some comments though that were a bit more dovish in my opinion that helped fuel the rally this week. While he did comment that economic activity is expanding at a strong pace, he also stated that inflation has moderated since the middle of last year and readings over the summer were quite favorable. Overall they will remain diligent on getting the economy on a sustainable path to 2% inflation and too early to talk about rate cuts, but it seems like they are feeling better about the recent data. Looking at the futures market, it has just about taken a further rate hike off the table (under 10% probability) and expects the first rate cut at the 5/1/24 meeting.
Finally, we get to the bond auctions. While there will still be a lot of activity in this area, the schedule for auctions was largely for shorter term bonds. Remember when bond prices decrease, the yield or rate goes up. So if a lot of 10-30yr bonds are dumped in the market, prices will decrease and yields will rise on those bonds which has been a large contributor to the recent run up in the 10 year rate. The fact that these longer-term bond auctions will be less frequent caused longer term yields, such as the 10 year yield to decrease significantly this week.
We need a lot more weeks like this! The expected rate will be an eighth lower this week as the 10-year weekly average finished at 4.75.
Have a great week!