Market Commentary: Week of September 11, 2023

Last Week

Economic data last week painted a picture of an economy still humming and a labor market still relatively tight. In reaction to the data, as well as a growing consensus that the Fed can still engineer a soft landing, the front end of the curve sold off with the 2-year bouncing up against 5%. Fed Fund futures and OIS swaps have now priced in about a 50% chance of one more policy rate tightening in 2023, most probably for the November FOMC. The strength of the U.S. economy and the belief rates will be higher for longer have lit a fire under the U.S. Dollar. Since the beginning of August, the Bloomberg Dollar Index (DXY) is up approximately 3.2%, which is quite a big move for the global reserve currency. Interestingly, over the same time period, WTI crude oil front futures contract is up 6.98% in USD terms. During the same time period, the Japanese Yen has weakened considerably, approaching the 150 Dollar Yen mark. Therefore, in Yen terms, crude oil has increased approximately 11.3%. It seems the markets are not paying much attention to Japanese monetary policy but at some point, the combination of global inflation and weak currency is going to produce something unsavory in the Japanese rates markets which will spill over to the global rates markets. It is just a matter of when, not if.

• The S&P 500 retreated 1.28% for the week. The average daily move was 0.40%.
• The NASDQ dropped 1.93% for the week. The average daily move for the week was .53%.
• The 2-year Treasury yield rose 11 basis points, closing at 4.99% on Friday. High year-over-year 5.08%, low yield 3.39%.
• The 10-year Treasury yield increased 9 basis points for the week, closing at 4.27% on Friday. Year-over-year high yield 4.34%, low yield 3.10%.
• The VIX Index dropped 5.7% for the week, closing at 13.84 on Friday. Year-over-year high 34.45 and low 12.91.
• The MOVE Index declined 1.8% for the week, closing at 104.34 on Friday. Year-over-year high 198.71 and low 97.33.
• 5-year Investment Grade Corporates (as measured by Markit CDX) spreads increased 1 basis point, closing at 64 basis points on Friday. High spread Year-over-year high 111 and low of 62.
• 5-year High Yield corporate debt (as measured by Markit CDX) spreads widened 8 basis points, closing at 430 basis points on Friday. Year-over-year high 627, and low 408
• US Dollar Index jumped 0.82% closing at 104.08 on Friday. Year-over-year high 114.11 and low 99.77.
• WTI Crude declined 2.29% for the week, using the October WTI Futures contract, closing at 87.51 on Friday. Year-over-year high 92.64, and low 66.74.  
• Gold, as measured by the December futures contract, declined 1.27% for the week, closing at 1,942 on Friday. High price for the front contract year-over-year 2,056 and low 1,624.
• Bitcoin rose for the week closing at 25,902 on Friday. High price year-over-year 31,386 and low 15,632.

The Week Ahead  

We start the week this morning with the Treasury curve steepening a bit while global equities are up a fair amount. This week is packed with tier one economic data. On Wednesday, we get August CPI. The focus will be on the core month-over-month CPI, which has logged two consecutive 0.2% increases. The Fed is looking for a 3^rd 0.2% print for further evidence that we continue to make progress on the inflation front. On Thursday, we get August Retail Sales and PPI and on Friday University of Michigan Consumer Sentiment. Away from the data, this Thursday seems to be the deadline for a new deal between the UAW union and the “Big Three” automakers. Both sides appear to be very far apart and dug in. A strike may have the effect of a FOMC rate hike, especially if it is prolonged. The Fed is in its quiet period ahead of next week’s FOMC meeting.

Definitions:

An index is unmanaged and not available for direct investment. Definitions sourced from Bloomberg. The Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Value Index represents the portion of the Bloomberg Barclays Global Aggregate Index that measures the aggregate value of global debt with a negative yield. • The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization. • The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.• The Cboe Volatility Index® (VIX) is a calculation designed to produce a measure of constant, 30-day expected volatility of the US stock market, derived from real-time, mid-quote prices of weekly S&P 500® Index (SPX) call and put options with a range of 23 to 37 days to expiration.• The ICE BofA MOVE Index is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options. It is the weighted average of implied volatilities on the CT2 (Current 2 Year Government Note), CT5 (Current 5 Year Government Note), CT10 (Current 10 Year Government Note), and CT30 (Current 30 Year Government Note), with weights 0.2/0.2/0.4/0.2 respectively.• The Markit CDX North America Investment Grade Index is composed of 125 equally weighted credit default swaps on investment grade entities, distributed among 6 sub-indices: High Volatility, Consumer, Energy, Financial, Industrial, and Technology, Media & Tele-communications. Markit CDX indices roll every 6 months in March & September. • The Markit CDX North America High Yield Index is composed of 100 non-investment grade entities, distributed among 2 sub-indices: B, BB. All entities are domiciled in North America. Markit CDX indices roll every 6 months in March & September. • The U.S. Dollar Index (USDX) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. Intercontinental Exchange (ICE) US computes this by using the rates supplied by some 500 banks.

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