Private Wealth

Weekly Research Briefing: Bounce

November 07, 2023

With the Treasury Bond markets significantly oversold going into the end of October, it was make or break time for the markets. The 5% level on yields was beginning to look like a ceiling and investors were increasingly lining up at their terminals to get in on the high rate, risk-free action. With this in mind, let's draw up a wish list for fixed-income investors that would get them to back away from their bearishness and even move them over into the 'BUY' camp:

  • Slowing labor growth and slowly rising unemployment
  • Falling wages, unit labor costs and inflation
  • Unexciting Q3 earnings releases
  • A Federal Reserve becoming more concerned about slowing growth than rising inflation

So basically, every condition on this list was met last week for bond investors. And the market bounced and ran far. Oversold (and overbought) markets can do crazy things, and last week was a star example of this. The catalysts all lined up and bonds finally bounced.

Wednesday's FOMC release and Chairman Powell's talk strongly suggested that the Fed sees less need for further rate hikes as the jump in market rates has slowed the economy. And Friday's labor report showed that the market continues to add jobs but at a slowing rate. Wage rates also continued to slow down. So, either we are headed for a Goldilocks soft landing or something harder. Higher interest rates are done. The next Fed move will be a cut in rates as the unemployment rate moves through 4% on its way higher. The market is now betting on the first Fed funds rate cut happening at either the March, May or June FOMC meeting.

This was all good news for the Treasury longs. But the Credit and Equity longs also joined in the rally as the 50-basis point decline in Treasury yields means a lower cost of financing for anyone borrowing capital. And even though the weak Maersk guidance and sluggish Apple revenues were negative macro data points, there were many other positive company reports to indicate that many companies continue to deliver upside right now. Toyota, Trane, Parker Hannifin, Cardinal Health, CBOE Global, Arista Networks to name a few of last week's winners.

The S&P 500 VIX went from a drinking age back to not being able to drive or even get a learner's permit. The stock market was led by those stocks and industries who were most affected by soaring interest rates: long duration, unprofitable biotech and tech companies, homebuilders, commercial REITs, banks, and small capitalization companies. Now we shall see if there is a follow through move into year end. The breadth and volumes were pretty good on this oversold condition so I would be surprised if stocks gave back their entire move. The S&P 500 remains expensive but there are definitely some attractive sub-segments as well as other geographies as long as earnings can hold together.

This is a thin week of data and big company earnings. But two pages of Fed speakers this week including a double-header by the Chairman. Enjoy this incredible weather.

The Fed now wants to see how 5% risk-free rates has impacted the economy...

“So I think what we can say is that financial conditions have clearly tightened and you can see that in the rates that consumers and households and businesses are paying now and over time that will have an effect. We just don’t know how persistent it’s going to be and it’s tough to try to translate that in a way that I’d be comfortable communicating into how many rate hikes that is.” - US Federal Reserve Chair Jerome Powell

The Transcript

U.S. jobs continue to grow, but at a slower rate...

The economy is still generating jobs. A year ago, a lot of economists and Federal Reserve policy makers thought that it would be shedding them by now.

On Friday, the Labor Department reported that the U.S. added a seasonally 150,000 jobs in October from the previous month, versus September’s gain of 297,000 jobs. Some of that step down was due to auto workers’ strikes, which have since been resolved but temporarily caused workers to not draw paychecks.

Average hourly earnings rose 0.2% from a month earlier, putting them 4.1% higher than a year earlier. That was the smallest year-over-year gain since June 2021, though unlike then wages are now outpacing inflation.

One takeaway is that the job market is moderating, but not buckling—a message reinforced by a variety of other data, including low levels of weekly unemployment claims and layoffs.


As expected, jobs and wages are slowing as the unemployment rate heads toward a 4-handle...

BofA Global

Wages slowing as anticipated which should lead to falling prices on goods and services in future months...

The Daily Shot

An incredible week for Treasury yields as each big news release was fuel for its fire...

The Daily Shot

The good news in the refunding announcement was that it was below expectations...

Yes, the U.S. still needs to borrow more over the next three months than the previous three months, but the expectation was that it would be significantly more.


Both the two's and ten's showed significant declines in yields as investors shifted away from the 'higher for longer' mindset...


I nominate Barron's for 2023 Market Timer of the Year...

If you shifted any assets from cash to bonds on this call, then your subscription is now paid up for the rest of your life. Nice work.


The market's Fed Funds outlook sees the chance for a 0.25% cut at the March meeting...

More likely is a cut at the May or June FOMC meeting. Keep an eye on job growth and the unemployment rate for the tell.

CME Group

Too soon?


All asset classes responded to the plunge in risk-free rates last week...

A shock cross-asset rally just dealt Wall Street a lesson in the dangers of market timing.

Evidence that Federal Reserve Chair Jerome Powell is turning less hawkish fueled the biggest concerted melt-up since November 2022, with stocks, bonds and credit rising in tandem, according to Bloomberg-compiled data tracking popular ETFs. Among other catalysts: A palatable Treasury borrowing plan and a weak jobs report that fed dovish appetites among investors.

Thank bearish price action in recent months — and defensive positioning — for lowering the bar. Evidence is rife that caught-short hedge funds along with systematic quants have been forced back into all manner of assets this week.


Most important to my eyes was the strength in the high yield debt markets...

Last week's move told me that the biggest risk to credit right now is not weakening company fundamentals but instead the absolute level of risk-free rates.

Last week's market moves helped improve the GS U.S. Financial Conditions index...

Overall, conditions are still on the tight side given the absolute level of interest rates, but the index is meaningfully better than it was to start November. Now let's see if the index can recover to Aug/Sept levels where we can start thinking about IPOs again.


Last week's sharp reversal in interest rates lit fuses on many sector bottle rockets...

The biggest gainers were long duration earners like unprofitable high growing techs and biotechs. Real estate companies and REITs focused on single family housing as well as commercial real estate put up big returns. Small cap stocks also came roaring back. Even preferred stocks put up a big week as retreating rates are healthier for bank balance sheets and the outlook for credit.

Marty Zweig would have liked last week's broad advance off of a very oversold level...

@RyanDetrick: We officially saw a super rare Zweig Breadth Thrust today. Thanks to @NDR_Research for the data. This rare signal is simply stocks moving from very oversold to overbought in less than two weeks. All you need to know is since WWII, the S&P 500 is higher a year later every time.

Now time to watch for a follow through in stock movement...

Among the corporate earnings last week were a surprising number of strong beats which led to new breakouts...

And the names were from multiple industries like autos, aerospace, industrial, insurance, networking, financial markets, etc.

In M&A news, a big timeshare company buys a smaller one for an all cash, 100% premium...

Hilton Grand Vacations Inc. agreed to buy timeshare operator Bluegreen Vacations Holding Corp. in an all-cash deal with a total enterprise value of about $1.5 billion including net debt.

Hilton Grand Vacations is offering $75 for each share of Bluegreen’s Class A and Class B stock, according to a statement Monday. The deal is expected to close during the first half of next year.

Hilton Grand Vacations slumped 8.8% to $33.96 at 11:32 a.m. in New York Monday. Bluegreen shares more than doubled on the news, hitting $73.17. The stock had closed at $35.52 Friday.

The Hilton Grand Vacations and Bluegreen deal will combine two timeshare companies with resorts in cities including Charleston, South Carolina, and Las Vegas. With the transaction, Hilton Grand Vacations will boost its membership base to more than 740,000 owners and its resort portfolio to nearly 200 properties.


The 30-yr fixed mortgage rate is now 65bps off of its October high...

Will buyers come right off the fence or wait to see how the next few weeks play out?

Mortgage News Daily

Not sure if a move lower in rates will do much to help the Q4 sales of one of the largest hard surface flooring retailers...

"...we have experienced an unexpected accelerated decline in our comparable store sales from the lagged effect of these policies in the early part of the fourth quarter of 2023..To take this into account, we have updated our 2023 sales and earnings guidance, which now reflects the potential that the accelerated decline in our comparable store sales could be sustained for the remainder of the fourth quarter" - Floor & Decor Holdings CFO Brian Langley

The Transcript

Ditto for swimming pool installations in 2023...

@TheTranscript_: $POOL CEO: "“New pool construction is likely to finish down, with units down 30% in 2023… Volumes on certain discretionary products, such as above-ground pools, heaters and cleaners reflected weakness, suggesting consumer hesitation on these more discretionary items"

Apple's sales did little to inspire last week as the new iPhone and China slowed its gains...

Apple’s fiscal fourth-quarter results late Thursday indicate that its newest iPhones aren’t off to a raging start. The company launched the iPhone 15 family during its usual window about a week before the quarter’s end in late September. iPhone revenue for the quarter rose 3% year over year to about $43.8 billion, in line with analysts’ forecasts. But that compares with a 10% gain in the previous year’s fourth quarter and a 47% surge in 2021, when the iPhone 13 family launched to surprisingly strong demand.

Expectations also don’t seem terribly strong for the current quarter ending in December. Apple said on its conference call Thursday that it expects overall revenue to be flat compared with the same period last year, which would be below the 5% gain Wall Street was expecting. And Chief Financial Officer Luca Maestri would only say he expects iPhone revenue to grow for the period. Analysts were projecting 6% growth for the quarter, according to FactSet.


But where remodels, swimming pools and iPhone 15's might be light, the consumer is still treating themselves to smaller spending...

Little treats are helping to keep the US economy afloat. At least for now.

While Americans dial back purchases of pricey items like boats and fridges, companies and economic data both point to a consumer who’s willing to pay up for inexpensive indulgences. Starbucks Corp., Chipotle Mexican Grill Inc. and PepsiCo Inc. have all said their sales remain strong as shoppers shell out for $7 lattes and $11 burrito bowls. Spending for things like airline travel, luggage and gambling is holding up, too.

“It appears that the savings cushions were probably a bit bigger than we previously estimated,” said Brett House, an economics professor at Columbia Business School. “As a result, there’s still a little bit more gunpowder for affordable luxuries, and experiences and other services.”


The big banks are a dismal group of forecasters...

With 2024 outlooks like this, how could any of them want to lend?

Goldman Sachs

It is only the beginning of the global private capital markets taking share from the public equity, public debt and bank lending markets...

Apollo Group

Marc Rowan also laid out how more credit business will be leaving the bank balance sheets...

"Banks today in the U.S. markets are roughly 20% of debt capital to consumers and businesses. All of you, investors, now supply 80% of debt capital to businesses. In addition, the changes that are now proposed to occur following the debacle at SVB First Republic and Credit Suisse will further lead to de-banking. When regulators ask banks in the U.S. to put up 15% more capital, they're asking the banks to shrink or to shrink lines of business. When Europe moves from Basel III to Basel IV, they're asking banks to shrink. This is happening around the world. de-banking is not something that is periodic. It is that it's very early infancy. It does not mean that de-banking is a bad business. It does not mean that four big banks don't have amazing businesses. They do. But it means on the margin, they will continue to play less and less as a percentage of the total and new investors will play more and more. That tells me as investors that you will see over the next decade a series of financial products that you've never seen before because they have historically been resident only on the balance sheets of large banks, and they are on their way to you as investment product." - Apollo Global Management Senior MD & Director Marc Rowan

The Transcript

The fourth super El Niño since 1950 is headed our way...

Dress accordingly. More umbrellas needed in the south. Fewer sweaters in the north.

BOULDER, Colorado — The temperature of the ocean water in the tropical Pacific Ocean west of South America is already warmer than normal, which is a condition known as El Niño.

A new climate model developed at the National Center for Atmospheric Research (NCAR) is predicting that warming will continue into December, becoming one of the warmest or strongest El Niños in history.

“It’s very much the case that the stronger the El Niño, the greater the impacts," said NCAR research scientist Steve Yeager.

He said when an El Niño warms to a wintertime average of more than 2 degrees Celsius above normal, it's often referred to as a super El Niño. That's not an official term but he said it's just becoming an acceptable description in the media, the public and also among scientists.

And there have only been three occurrences of super El Niños since 1950, when sea surface temperature records began.


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