It’s worse than it seems

Thoughts of the Day

Australian employment data for September disappointed, with only +6.7K jobs added, falling short of expectations (EXP +20K, PREV +63.3K). The drop of the unemployment rate from 3.7% to 3.6% (EXP 3.7%) is not a sign of strength because the people who were looking for full-time jobs dropped by 19.7K to 338.3K possibly due to the difficulty of getting jobs. This data indicates weakness in the economy, potentially limiting future interest rate hikes.

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Day Ahead

Federal Reserve Chairman Powell is due to make a speech at the Economic Club of New York Luncheon and the market will be watching out for comments about monetary policy and the impact of rising bond yields on future policy steps.

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What Happened Yesterday

Market Movements as of New York Close 18 Oct 23
  • Fedspeak:
    Waller (current voter, known centrist):
    “I believe we can wait, watch and see how the economy evolves before making definitive moves on the path of the policy rate.”
    Bowman (current voter, known hawk): “What has been somewhat surprising, however, is that the relative strength in goods spending has persisted, rather than reverting to its pre-pandemic trends.”
    (Similar sentiment for Waller and Bowman)
  • Australian labour data showed that the Australian economy added +6.7K jobs in September (vs +20k expected), a significant moderation from the +64.9K jobs added in the previous month. Oddly, the unemployment rate dipped slightly to 3.6% from 3.7% previously (and expected). This could be a fall in the labour force participation rate from 67% to 66.7% (vs 67% expected). The AUD fell -0.44% from 0.6326 to 0.6298 following the release of the data.
  • The UK CPI showed that prices rose 6.7% Year-on-Year in September as it did in August (vs 6.6% expected). The core index showed a 6.1% rise in prices YoY (vs 6% expected), lower than 6.2% previously. The GBPUSD went up slightly by +0.15% from 1.2184 to 1.2202 in reaction.
  • The final print for the Euro Area CPI showed that prices rose 4.3% Year-on-Year in September as expected, lower than 5.2% in August. The core index  rose 4.5% YoY as expected as well, lower than 5.3% previously. EURUSD reaction to the data was muted.
  • The US Treasury Yield curve inversion narrowed to 0.28% as the US 2-year bond yield remained at 5.19% while the US 10-year bond yield rose +0.08% to 4.91%. 
  • The US stock futures traded within a range through the Asian and London trading hours with a slight negative drift. The S&P 500 futures were down -0.35% before the New York session began.
  • The US stock market opened lower from Tuesday. The market then traded lower through the bulk of the New York session. Consequently, the S&P 500 closed the day lower at -1.34% (high: -0.21%, low: -1.59%), the Dow slipped -0.98% (high: -0.02%, low: -1.17%) while the Nasdaq plugned -1.41% (high: -0.12%, low: -1.69%).
  • [Earnings] Morgan Stanley (NYSE: MS, -6.79%) Earnings: $1.38 vs $1.28 expected, Revenue: $13.27 billion vs $13.23 billion expected. The stock underperformed despite earnings beat due to revenue misses in the wealth management and investment banking divisions. However, the misses were offset by the trading operations division.
    • United Airlines (NASDAQ: UAL, -9.67%) Earnings: $3.65 vs $3.35 expected, Revenue: $14.48 billion vs $14.44 billion expected. The stock underperformed as the airlines highlighted higher fuel costs and geopolitical tensions in the middle east eating into its profits the next quarter.
    • Netflix (NASDAQ: NFLX, +12.83% in after hours trading) Earnings: $3.73 vs $3.49 expected, Revenue: $8.54 billion as expected. Outperformance with 9 million subscribers joining Netflix around the globe in the third quarter, surpassing Wall Street analysts’ forecast for 6 million.
  • The crypto market was just slightly weaker with Bitcoin and Ether down -0.27% and -0.11% respectively.
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Headlines & Market Impact

10-year Treasury yield breaks above 4.9% for the first time since 2007

Notable Snippet: U.S. Treasury yields rose on Wednesday with the 10-year hitting a fresh multi-year high as investors digested the latest economic data and considered the outlook for Federal Reserve interest rates.

The 10-year Treasury yield gained around 6 basis points to 4.908%, rising above 4.9% for the first time since 2007. Meanwhile, the 2-year Treasury yield was around flat at 5.22%, near levels last seen in 2006.

Markets are still pricing in an approximately 94% chance that rates will remain unchanged when the Fed announces its next monetary decision on Nov. 1, but the probability of a December rate increase rose after Tuesday’s data, according to the CME Group’s FedWatch tool.

In recent days and weeks, various Fed officials have indicated that the central bank may be done hiking, especially as higher Treasury yields are contributing to tighter economic conditions. Further comments from policymakers are expected this week, including by Fed Chairman Jerome Powell, and investors are looking to their comments for hints about their policy expectations.

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Biden admin unveils sanctions on Iran’s missile, drone programs after U.N. ban expires

Notable Snippet: The Biden administration on Wednesday vowed to maintain restrictions on Iran’s ballistic missile and drone programs after U.N. Security Council sanctions on Tehran’s missile arsenal expired. 

The administration announced new sanctions and other measures designed to prevent Iran from selling or acquiring parts or technology related to ballistic missiles or drones, saying that Washington would remain focused on the issue despite the expiration of the U.N. measures.

Russia has said it is no longer bound by the U.N. Security Council restrictions that expired Wednesday, though it has not indicated whether it would opt to provide technology or assistance to Iran’s missile projects.

The U.N. restrictions expired under a “sunset” provision in the 2015 Iran nuclear deal, which eased sanctions on Tehran in return for limits on the country’s nuclear program. Then-President Donald Trump withdrew the United States from the deal in 2018 and reimposed U.S. sanctions and introduced new sanctions.

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Tesla CEO Musk raises alarm on interest rates, hesitates on Mexico factory

Notable Snippet: Tesla (TSLA.O, -4.78% on the day and -4.24% in after hours trading) CEO Elon Musk said on Wednesday that he was concerned about the impact of high interest rates on car buyers, adding the electric vehicle maker was hesitating on its plans for a factory in Mexico as it gauges the economic outlook.

After the company missed Wall Street expectations on third-quarter gross margin, profit and revenue, Musk said he wanted to get a better sense of where the economy was headed before going “full tilt” on the Mexico factory.

Tesla has managed to maintain demand with a series of price cuts, but Musk spent much of the call voicing concerns about further expansion, saying that he was afraid rising interest rates would make cars unaffordable.

Earnings: 66 cents vs 73 cents expected

Revenue: $23.35 billion vs $24.1 billion expected

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Phan Vee Leung
CIO & Founder, TrackRecord