October 2, 2023
Good morning,
No shutdown this weekend – that leans okay, you would think. It appears not to be, given this morning’s weakness in Futures prices (down 1% from overnight highs and down .20% from Friday’s close). The U.S. government has averted a spending shutdown in circumstances too contorted to bear repeating. Markets are shrugging off the weekend deal, having not taken it too seriously and knowing the same brinksmanship (being kind) will return when the stopgap measure expires in 6 ½ weeks.
There was a happy narrative coming into the week for traders. The worst month of the year, historically, was over – one could argue that seasonality winds should be shifting positively for equities. The September selloff was steep, and mean reversion is expected. And when Congress kicked the can Saturday night, traders looking for a rally had hope. But as has been the norm for much of the past few years, the bond market has intruded into that happy narrative. Treasury yields across the curve are up sharply again this morning – most notable is the 10yr. Treasury at a new yield high at 4.64% (2yr. at 5.11%).
Jerome Powell speaks today at a roundtable event, but what has really changed since the Fed’s last press conference? Not enough to trigger a policy shift, that seems certain. The trend of higher yields, higher oil prices, higher dollar, lower gold prices, and lower stock prices looks to continue today. However, momentum is getting stretched and is slowing in each of those assets. A short-term relief rally would not be a surprise.
None of that changes the cautious long-term outlook. The U.S. economy is on a knife edge where weaker growth could tip it into recession while stronger growth could trigger a second wave of inflation. Both outcomes lead to a recession but not in the same time frame. We’ll dive into the macroeconomics on Thursday.
Be well,
Mike
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