As widely expected, the Federal Reserve (Fed) maintained its interest rates unchanged at this week’s meeting and President Jerome Powell cited that the recent surge – especially in the long end of the US yield curve – helped tighten the financial conditions in the US. Powell repeated that the Fed is proceeding carefully but that they are ‘not confident that inflation is on the path toward 2%’ target’. US policymakers redefined the US economic outlook as being ‘strong’, from being just ‘solid’.
In summary, the latest Fed decision was not dovish, unsurprisingly hawkish, and did not impact appetite in US bonds which got a boost from the Treasury’s announcement of a slightly lower-than-expected quarterly refunding auction size for the 3-Year, 10-year, and 30-year rate maturity bonds next week. The cherry on top, the US Treasury said that they now expect one more step up in quarterly issuances for the long-term debt, whereas the expectation was multiple more step-ups.
The US 10-year yield sank to 4.70% after the Fed decision and Treasury’s much-awaited issuance calendar reveal, the 30-year yield fell to 4.90%. The fact that the US will borrow slightly less than previously thought and slightly less on the long end of the curve doesn’t mean that the fiscal outlook improved. Though lower-than-expected, the $776bn that the US Treasury is planning to borrow this quarter is a record for the last 3 months of a year. And the net interest payments on the US federal debt are rising at an eye-watering speed. In numbers, the federal debt rose more than a third since the end of 2019, and the interest expenses on that debt rose by almost 40%. That’s a detail for Janet Yellen who thinks that the surge in US yields is explained by the positive economic outlook, but the market won’t allow the Treasury to borrow like its pockets have no bottom if the Fed is not part of it.
Bad News, Good News.
The sharp decline in October ISM manufacturing PMI and the softer-than-expected ADP read helped boost sentiment in US Treasuries, as they somehow softened the otherwise strong US economic outlook. The JOLTS data unexpectedly rose but no one was out looking for reasons to sell Treasuries yesterday, so that basically went unheard. The official US jobs data is due Friday and any strength in NFP, or wages could reverse the optimism that the US economic growth will slow. And as bad news is sometimes good news for the market, the S&P 500 rebounded more than 1% and closed the session at a spitting distance from the all-important 200-DMA, while the rate-sensitive Nasdaq jumped almost 1.80%.
AMD, Qualcomm (NASDAQ:QCOM) Gain, Apple (NASDAQ:AAPL) to Report.
On the individual level, AMD) jumped almost 10% yesterday. Even though the company gave a soft guidance for Q4, they said that they expect to sell more than $2bn worth of AI chips next year. That’s a lot, that’s more than a third of the actual revenue they make. Qualcomm jumped nearly 4% in after-hours trading, as the world’s largest seller of smartphone chips gave a better-than-expected prediction for this quarter, saying that the inventory glut in the mobile phone industry may be receding.
Today, Apple will post its Q3 earnings, after the bell. We have reservations regarding the results as the iPhone 15 sales are not as brilliant as investors hoped they would be, and Huawei is apparently eating Apple’s market share in China. Apple’s overall revenue is seen down by around 3%. Ouch. The good news is that the morose expectations could be easier to beat. Otherwise, we could see Apple tank below the $170 per share, into the bearish consolidation zone, and become vulnerable to deeper losses.
BoE Not to Raise Rates, but Its Inflation Tolerance.
The Bank of England (BoE) is the next major central bank to announce its rate decision today, and the Brits are not expected to raise the interest rates at today’s MPC meeting, but they are expected to increase their tolerance faced with above 2% inflation, instead. That’s not good for central bank credibility, even less so when the BoE’s credibility is not at its best since the start of this tightening cycle. If investors sense that the BoE will let inflation run hot, by lack of choice, sterling could take a significant hit.
Gold and Oil
Appetite in gold eases as Israeli attacks are perceived as being less aggressive than what they could be. De-pricing of Mid-East risks could send the price of an ounce to, or below the 200-DMA, near the $1933 level. Upside risks prevail, but fresh news should gradually lose their shocker impact and the $2000 per ounce level will likely attract top sellers more than anything else.
US crude rebounded near the $80pb yesterday, as the decline toward the psychological $80pb level brought in dip buyers. We could reasonably expect the US crude to correct toward $85pb as geopolitical tensions loom, and supply remains at jeopardy.