Is the tone starting to change?

Thoughts of the Day

San Francisco Fed President Mary Daly suggests that the Fed may not need further tightening as US Treasury bond yields surge. If bond yields persist at these levels or go higher, this sentiment will likely be echoed by other Fed officials in the weeks ahead

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Day Ahead

The US Nonfarm Payrolls is expected to show +163k jobs being added to the economy in September, down from the +187k in August. The US unemployment rate is expected to decline slightly to 3.7% from 3.8%.

The Canadian Employment Change is expected to show +17k jobs being added to the economy in September, down from +39.9k in August. The unemployment rate is expected to rise slightly to 5.6% from 5.5%.

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What Happened Yesterday

Market Movements as of New York Close 5 Oct 23
  • Fedspeak: Daly (2024 voter, slight hawk): “With the recent rise in US Treasury bond yields, the need to do additional tightening by the Federal Reserve is not there. We could easily overcorrect, we need to take the time to do it right. If cooling in inflation stalls or financial conditions loosen, we will need to raise rates further.”
  • US Initial Jobless Claims for the week ending on 30 September was 207k (vs 210 k expected), slightly higher than the previous week’s print of 205k (revised from 204k). The Continuing Jobless Claims for the week ending on 23 Sep dipped slightly to 1,644k (vs 1,675k expected) from 1,665k the week before (revised from 1,670k). The short term data for the labour market is showing slight strength for now.
  • The US Treasury Yield curve inversion narrowed to 0.31% as the US 2-year bond yield fell -0.02% to 5.03% while the 10-year bond yield fell -0.01% to 4.72%.
  • The US stock futures traded sideways through the Asian and London trading sessions with the S&P 500 just barely budging at -0.02% before the New York sessions began
  • The US stock market opened slightly lower from Wednesday. It then fell in the early hours of the New York session as the US 10 bond yield rose to 4.74%. However, it started to bounce from the lows as bond yields eased off for the rest of the session Consequently, the S&P 500 closed just -0.13% lower (high: -0.08%, low: -0.89%), the Dow was almost unchanged at -0.03% (high: +0.14%, low: -0.57%) while the Nasdaq slipped -0.36% (high: +0.06%, low: -1.30%).
  • The crypto market traded lower on a day with weakened risk sentiment. BTC was down -1.3% while the ETH was down -2.2%.
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Headlines & Market Impact

Fed says credit to wind down failed banks drops again in latest week

Notable Snippet: The Federal Reserve said on Thursday that credit it has extended to help wind down failed banks marked a big drop in the latest week.

The Fed reported what it calls “other credit” fell to $63.07 billion on Wednesday, from $81.9 billion on Sept. 27. The credit is being used by the Federal Deposit Insurance Corporation to deal with bank failures from the spring.

This type of credit stood at zero at the start of March, peaked at $228.2 billion on May 3, and has been falling by a notable amount since the middle of September.

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With eye on China, EU maps out de-risking, economic security strategies

Notable Snippet: The European Union wants to retain its industrial edge and competitiveness in a world shifting more to digital and green products, but has found itself worryingly dependent on others, particularly China for critical minerals.

As geopolitical tensions rise, after Russia’s invasion of Ukraine and with a U.S.-China standoff, risk is a keyword for the 27-nation bloc’s economic policy as it ponders how to guarantee supply chains and how widely to share technology.

The bloc wants to limit its dependency for certain strategic products, particularly those required for its green transition such as lithium used in electric vehicle batteries or rare earths found in wind turbine magnets.

China now processes nearly 90% of rare earth elements and 60% of lithium globally.

The EU repeats that de-risking does not mean decoupling from China, but says it has learned a tough lesson from relying on Russia for natural gas and then being cut off after Russia’s 2022 invasion of Ukraine.

EU wariness towards China has grown due to Beijing’s subsequent closer ties with Moscow. At the same time, the EU’s trade deficit with China has widened to 400 billion euros ($420 billion), double the level of five years ago.

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Why borrowing costs for nearly everything are surging, and what it means for you

Notable Snippet:  Violent moves in the bond market this week have hammered investors and renewed fears of a recession, as well as concerns about housing, banks and even the fiscal sustainability of the U.S. government.

At the centre of the storm is the 10-year Treasury yield, one of the most influential numbers in finance. The yield, which represents borrowing costs for issuers of bonds, has climbed steadily in recent weeks and reached 4.8% on Tuesday, a level last seen just before the 2008 financial crisis.

The relentless rise in borrowing costs has blown past forecasters’ predictions and has Wall Street casting about for explanations. While the Federal Reserve has been raising its benchmark rate for 18 months, that hasn’t impacted longer-dated Treasurys like the 10-year until recently as investors believed rate cuts were likely coming in the near term.

That began to change in July with signs of economic strength defying expectations for a slowdown. It gained speed in recent weeks as Fed officials remained steadfast that interest rates will remain elevated. Some on Wall Street believe that part of the move is technical in nature, sparked by selling from a country or large institutions. Others are fixated on the spiralling U.S. deficit and political dysfunction. Still others are convinced that the Fed has intentionally caused the surge in yields to slow down a too-hot U.S. economy.

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord