Weekly Market Report: October 13th, 2023
Last week the world began to sift through the aftermath and implications of the terror attacks in Israel which, beyond the horrific human toll, sent shock waves through global geopolitics and financial markets, beginning with interest rates and the oil sector. Global equity markets remained relatively calm with the S&P 500 up 0.46% and developed and emerging equity markets both relatively flat. The bigger moves on the week were in areas you might expect including oil (+6%), gold (+5%), and safe haven USD (+0.57%) and treasury bonds which saw yields decline across the curve and by double digits for longer maturities.
- Aside from the obvious human tragedy, the peculiar timing of the Hamas incursion into Israel last weekend has injected tangible uncertainty into global energy markets and geopolitical anxiety regarding the potential for escalation in the Middle East.
We saw a notable reversal in interest rates last week likely due to the geopolitical catalyst but also nudged by a series of dovish Fed comments noting high UST rates as lessening the need for additional tightening, suggestions that the implied market terminal rate is too high and downplaying the September CPI report.
High and rising UST rates mean higher debt service for businesses, government, and consumers as well as higher costs for projects and investments and mark to market losses on bond portfolios.
Torsten Slok from Apollo made note that with a 5.25-5.50% Fed funds rate and an estimated 2.5% neutral rate, corporate debt service coverage ratios are beginning to grind lower. Bianco Research echoed the same sentiment from the perspective of consumer interest expense.
Thirteen Fed speaking engagements and the release of October’s FOMC minutes reinforced a ‘no change’ rate decision at the upcoming November 1st FOMC meeting, currently priced at an 87% probability in the futures market. Future meetings carry only 32%-42% probabilities of a hike.
Third quarter earnings season kicked off with major banks reporting last week. Bottom line consensus is calling for -0.3% earnings growth, which if exceeded would mark the first positive YOY earnings results since 3Q22. Projected revenue growth is 1.7% and margins are expected to improve.
It was interesting to see UST yields decline sharply on the back of a blowout jobs report, relatively benign inflation report, and continually improving economic outlook.
Economic Release Highlights
September headline and core CPI registered 3.7%/4.1% YOY and 0.4%/0.3% MOM.
- The September NFIB Small Business Optimism Index declined slightly from 91.3 to 90.8, just short of the consensus forecast of 91.2.
- Consumer Sentiment for October registered a five-month low of 63.0, below consensus estimate of 67.5 and the prior month’s reading of 68.1.