Pause The Fed

This week we had many Fed Governors giving speeches warning of multiple rate increases, however, the message flipped on Friday. Nick Timiraos, a reporter at the Wall Street Journal (WSJ) who is known to be the reporter used by the Fed to float policy changes, wrote that 75 basis points would be the raise in November and then perhaps a slower pace in December.

I wouldn’t be surprised if there is a modification to the approach as the strong dollar wreaks havoc in overseas economies and I am sure politicians and foreign central banks are lobbying the Fed behind the scenes to make a pivot. Inflation will be with us for some time so the hawkish policies are not going anywhere if the Fed is serious about stomping out inflation. And let’s not forget that tapping the brakes on rate increases doesn’t mean the Fed stops reducing their balance sheet by $95B monthly. SO, maybe there is a rebalancing act with less rate increases and continued balance sheet reductions into 2023.

And there is consideration that the the mid-term elections are in a couple of weeks so that makes me think that this article was planted to calm markets and the the Fed out of the crosshairs of Congress.

The Bond Market

This chart below may be what is making the Fed nervous. The rate of change in 10Yr yields has been historic and puts the brakes on real estate markets and financing for public corporations. Not to mention the amount of paper losses in the bond market are becoming enormous.

10Yr Bond Yields

Rising Across All Tenors

Abrupt increases in shorter term interest rates also affect consumers with auto loans and credit card APRs. Earnings from American Express on Friday showed that the company was taking higher loan loss reserves against their credit card portfolio so lenders have an expectation that consumers will be strained in the coming months.

Bond Yields by Tenor

Earnings Galore Next Week

Hundreds of companies will report next week so we will have a good look at what is going on with the economy and below are the notables:

Tuesday: Microsoft, Google, Visa, Coca-Cola and UPS.

Wednesday: Meta Platforms (Facebook), ADP, Boeing, and Ford Motor Company.

Thursday: Apple, Amazon, Mastercard, Merck, McDonald’s, T-Mobile, Comcast, Intel, Starbucks, and Caterpillar.

Friday: ExxonMobil, Chevron along with pharmaceutical firms Sanofi and AbbVie.

The Stock Market

Below is the chart of the S&P 500 futures with the various events that have marked the price action since August. We have been trading in a range since mid-September and the rise on Friday was a push to the top end of the range. There is resistance at the 38.2% FIB at 3806 so maybe that gets re-tested next week if the earnings reports are received well by the market. A move above 4000 would look like a bottom is forming and maybe that happens if the Fed blinks like they did in 2018.

S&P 500 Futures.

Economic Stuff

  • The Treasury International Capital (TIC) flow data for August showed that foreigners bought $174B of US notes and bonds which is the biggest on record. Japan and China participated for the first time in months as the strong dollar and relatively higher interest rates are too good to pass up.
  • The Manheim Used Car Index said that wholesale prices fell 2% in October and 10.3% lower compared to 2021.
  • US Industrial Production for September came in up 0.4% while the August number was revised higher. Manufacturing production was the strongest part of the report.
  • The Bank of Indonesia hiked rates by 50 bps as expected to 4.75%.
  • The October Philly Manufacturing Index was -8.7 from -9.9 and vs the estimate of -5.0. The 6 month business outlook was negative for a 5th straight month and expectations for prices paid and received fell notably. (Boockvar)
US Existing Home Sales.
  • The October NY Manufacturing Index fell to -9.1 from -1.5 and that was below the estimate of -4.3.
  • Real Estate company, Redfin, said in September “The number of homes sold dropped 25% YOY while new listings fell 22%. They went on to say, “…demand is slumping due to surging mortgage rates, but prices are being propped up by inflation and a drop in the number of people putting their homes up for sale.”
  • Inflation is finally showing up in Japan as the September CPI Japan rose 3% headline which is the highest in 32 years.
  • Australia reported a weaker than expected jobs number for September. 
  • Germany reported Producer Prices up 45.8% compared to last year.
  • The UK September CPI rose 10.1% compared to 2021.
  • Turkey’s central bank cut its key interest rate for a third consecutive month on Thursday, intensifying an economic policy that has caused a collapse in the country’s currency. 
Turkey's CPI.
  • Highly rated corporate bonds issued in the British pound have posted a negative total return of around 25% this year as measured by the ICE BofA Sterling Corporate Index, by far the largest loss in the index’s almost 26-year history. In comparison, a similar index tracking U.S. dollar bonds is down 18% while one for euro-denominated bonds has lost 15% on a total-return basis, which includes price changes and interest payments. (WSJ)
TR on UK Bonds.

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Paul McCarthy, President of Kisco Capital, LLC

Paul J. McCarthy III


Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.