Another week, another stomach churner. Equities had their second bad week in a row as the tone from 3rd quarter earnings calls has been one of caution and weaker forward projections. Wall Street analysts used the term “earnings recession”, which was worn out by weeks end. After months of ignoring the firestorm in rates markets, equities are now waking up to a realization that while corporate earnings and the economy will begin to show real signs a weakening, the economy is still running strong enough to keep interest rates higher for longer. Perhaps we should call this the ”Anti-Goldilocks” market, both too hot and too cold! Meanwhile interest rates gyrated all week with multiple flights to quality, driven by the events in Israel and Gaza. Rates ended up down about 8 basis points across the curve for the week. The tone to the rates market was one of confusion and fear. The release of 3rd quarter GDP showed the economy growing at an astounding 4.9% with the GDP Deflator up more than expected month over month. Perhaps the only thing keeping rates from blasting off was the heightening geopolitical fears.
This week may be the most action-packed week we have seen in perhaps forever. Tonight, the Bank of Japan (BOJ) meets. The BOJ is caught between a rock and a hard place. Some expect the BOJ to signal the beginning of the end of Yield Curve Control (“YCC”). Currently the yield cap on the 10-year JGB is 100 basis points. The yield on the bond has been creeping up toward the cap as well, closing at 89 basis points last night. Against this potential policy change is the weakening Yen, currently bumping right up against 150 to the US Dollar. A concern is if the BOJ doesn’t really lean into a tightening of monetary policy, perhaps ending negative rate policy (BOJ policy rate now negative 10 basis points) the Yen blasts through 150, which in turn will put greater inflationary pressure on the economy. If the BOJ is perceived as too aggressive, all heck may break loose! On Wednesday we get the Fed’s FOMC meeting policy announcement followed by Chairman Powell’s press conference. Currently the possibility of a rate hike is seen as zero (looking at Fed Fund Futures and OIS Swaps). However, the forecast for December and 2024 will be crucial. Also important, on Wednesday we get the 4th quarter Treasury refunding/issuance announcement. A mountain of new supply is expected. Meanwhile, all week we get a slew of Tier One data, culminating in the October Employment Report on Friday. Good luck!
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