November 7, 2023
A confirmed peak in bond yields would likely be an equity friendly development as long as we remain in a ‘bad news is good’ phase for equities. It’s very difficult to distinguish between a healthy slowdown/soft landing and the initial stages of a recession. But we see the narrative shifting to a ‘bad news is bad’ phase once monthly payroll growth moves below 50,000 or turns negative. This means the current narrative could remain intact at least until November payrolls are reported on Friday, December 8.
Ten-year bond yields are down ~7bp to 4.57% today after a string of global data disappointments that would normally generate greater downside if it weren’t for this week’s outsized Treasury issuance. October exports from China fell short of expectations, German industrial production for September missed, and EU PPI deflation fell deeper into contraction at -12.4% YoY. Downbeat earnings and cautious guidance from US Industrial/Materials companies contribute to the move in yields as do comments from a BOE official about the increased likelihood for rate cuts by mid-’24. However, all this news is overshadowed by last week’s more friendly Treasury refunding announcement allowed yields to fall to current levels, but markets may need proof of lower issuance before yields more accurately reflect macro fundamentals. This is important because, in our opinion, ten-year yields below 4.48% would confirm a cycle peak in bond yields.
We maintain our tactically bearish outlook for the S&P 500 (SPX) with ~4430 capping the bond yield-induced relief rally. We see time running out for the ‘bad news is good’ phase as the yield curve inversion continues to mature and growth concerns emerge as the dominant theme.
It’s another busy day of Fed speakers with Barr, Schmid, Waller, Williams and Logan mostly pushing back on market expectations for rate cuts to begin in mid-’24. Yesterday, Minneapolis Fed President said he’s not convinced that rate hikes are done and stressed he would err on the side of overtightening policy.