Higher Bond Yields
September 7, 2023
Takeaways from yesterday’s release of the Fed’s Beige Book were mostly downbeat with some districts flagging corporate margin headwinds and exhausted excess consumer savings. And it’s another busy day for Fed speakers with Williams, Bostic, Bowman and Logan on the schedule. US weekly jobless claims came in lower than expected and became the latest data point with upside rate implications. However, bond yields are lower today on a decline in Eurozone yields that followed weaker industrial production out of Germany and a downside revision to regional Q2 GDP. UK yields are also lower after BOE Governor Baily made dovish comments and the UK Decision Maker Panel (DMP) resulted in lower 1-year CPI expectations.
A combination of rising oil prices and heavy corporate bond issuance on Tuesday plus yesterday’s stronger ISM services report will result in higher bond yields, which puts pressure on equity markets. On average, September is the second highest month of the year for corporate bond issuance. Tuesday’s $36.2B in investment grade bond issuance was the sixth highest in history and the busiest day since March 30, 2020. Next Wednesday’s CPI print is expected to be the most significant near-term catalyst for bond yields, but the event is somewhat de-risked given consensus expectations for YoY headline CPI to rise to +3.5% from +3.2% in July.
A temporary end to the disinflation theme should make this a ‘bad news is good’ phase for equity markets when it comes to data. We should specify this is only true for growth-related data. Disappointing labor market and/or consumer credit data that drives deep recession concerns will result in meaningful downside for equity markets. At the moment, the probability we assign for this type of outcome is below 20%.
In our view, the near-term bullish scenario for equities requires the Fed to explicitly or implicitly end its hiking cycle. Fed officials have made it known that they want to see three consecutive declining inflation prints to feel comfortable that we’re in a sustainably declining inflation environment. The earliest window for this to happen is in Q1’24 with January-March headline CPI printing an estimated 2.9%, 2.7% and 2.6%.