Both equity and rates markets were hit by tremendous bouts of volatility last week as the Israel-Gaza conflict unfolded. The rates market’s initial reaction was a strong flight to quality/short covering bid as Treasury yields cratered Monday. However, as the week went on, anxiety over the growing supply-demand imbalance for government debt as Thursday’s 30-year Treasury bond auction tailed significantly. Additionally, the September CPI report, also released Thursday, showed that the pace of “disinflation” has slowed for the second consecutive month. Corporate and municipal bonds underperformed Treasury bonds on the week as dealers and investors alike used the rally in rates to unload positions. All in all, the tone continues to feel quite ugly. Meanwhile, stocks were somewhat mixed as the 3rd Quarter earnings releases for the big banks came in stronger than expected. However, talk of an imminent earnings recession has begun to take over the conversation with regard to outlook.
We come in this morning with Treasury yields higher, led by the long end of the curve while equities are up a fair amount. Geopolitical tensions dominate as it appears Israel is ready to launch a bloody ground invasion of Gaza. Focus, from a geopolitical perspective, is zeroing in on Iran and its proxies as to how involved they plan on getting. The U.S. will have two carrier task forces in the region to persuade them to stand down somewhat. Currently risk markets are somewhat ignoring the conflict with the thought (hope?) that the events in the Middle East stay contained. On the economic data front we get September Retail Sales Tuesday. For stocks, 3rd quarter earnings season begins to kick it into high gear. This week we also have a steady dose of Fed speakers. On Thursday, Chairman Powell speaks in New York.
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