The next stop on the Fed’s train to lower inflation is this Wednesday where interest rates will stay unchanged. Unfortunately, the inflation data has been sticky including the Personal Consumption Expenditures (PCE) that was released on Friday.
One more important announcement to watch on Wednesday is the US Treasury quarterly refunding schedule. Their last announcement on August 2nd sparked a sharp rise in 10Yr Treasury yields as the amount of bonds they needed to sell was higher than the market expected. The higher deficits will likely cause a sizable amount to be issued this quarter and that could move the long end of the curve. The proposed aid packages for the wars in Israel and Ukraine will also weigh on the budget so there are a lot of variables in play for the interest rate markets.
Q3’s Backdoor Stimulus
The next quarter will get harder for the financial markets as Q3 GDP came in at +4.9% which is not going to be repeated. For example, the deficit spending by the Federal government this year translates into a form of stimulus. The US Treasury provided help as debates over the debt limit caused the Treasury to temporarily halt bond sales and borrow from government pools of savings. These actions counterbalanced the Fed’s quantitative tightening and interest rate hikes. As the Treasury spent its deposits at the Fed, it created an injection of liquidity and increased the money supply as these monies ended up in household and corporate deposits.
However, this was a temporary situation as these accounts will need to be replenished and that means more bond sales which makes this refunding announcement on Wednesday all that more important to bond traders. The deficit also continues to widen as Congress keeps kicking the can down the road and the next deadline on the debt limit is mid-November so that will also be a factor for bond markets going into 2024.
10-Year Treasury Yields
The long end of the curve has dominated the conversation in the bond markets as you can see in the chart below its ascension. Based on the technicals, this recent move could use some consolidation but the announcements next week could cause another push higher in this tenor. Resistance is at 5.05% so a move above that level would warn a continued push higher. In either case, the trend is higher for 10Yr yields.
The S&P 500 Chart
The S&P has continued to fall over the last two weeks and momentum may be picking up as we head into next week. Given the rise in yields and the backdoor stimulus of 2023 coming to a close, the stock market needs to adjust to a world of higher yields.
Just keep in mind that the last high was almost two years ago which means this could be the next leg down of the bear market.
Thank you for being a subscriber!
President, Kisco Capital