“If everything you try works, you aren’t trying hard enough.”  ~ Gordon Moore

Good evening:

As the week opened, Head of Technical Strategy Mark Newton pointed out that in the past, this week has been one of the worst of the year in a historical/seasonal sense. This trend continued this week, with stocks sliding slightly on Monday and Tuesday, then falling sharply after the FOMC meeting and subsequent press conference. 

“We’ve seen a pretty sharp sell-off in both equities and the bond market,” our Head of Research Tom Lee acknowledged, “and that’s naturally led to a lot of angst.”

With the target range for Fed funds remaining unchanged this month, it’s clear that the markets had a hawkish reaction to the FOMC’s dot plot and Summary of Economic Projections (SEP). We saw a shift in the committee’s median expectations of YE 2023 and YE 2024 rates, as well as improved projections of GDP, inflation, and labor markets. Many market participants viewed the higher expectations for YE 2024 rates as a shift toward a “higher for longer” stance. Yields surged to multi-decade highs and equities sank in response.

But Lee viewed this as an overreaction, and suggested that the market would eventually come to see it as such and moderate accordingly. “The Fed raised its expectations of rates in 2024 not because inflation’s up – Powell made that clear several times,” he noted. “This was a response to a 40 bp increase in GDP estimates.”

He also pointed out that despite the shift in median expectations for hikes to the end of 2023, “they’ve actually removed some hawkish views between June and September.” In June, one FOMC member anticipated three more hikes before the year ended, and two anticipated two more hikes. Those three members have clearly gotten less hawkish in terms of rate-hike expectations. We illustrate that with our Chart of the Week:

Mark Newton, our Head of Technical Strategy, noted that despite Lee’s assessment, “we saw rates across the board scream up to the highest level since 2007. Historically, in recent months, we've seen a pretty good negative correlation between rates and equities, so with rates being up at the highest level of 16 years, we're seeing equities respond directly to this spike up in interest rates.”

Purely from a technical perspective, Newton sees no immediate change in rates: “When I look at a chart of the 10-year on a daily basis, what I see is that we're getting closer to what's going to be a pretty prominent peak in rates,” he said at our weekly huddle. “My own cycles suggest that rates are going to retreat, likely starting in late October, November, and down through next fall. I think we're going to have a pretty big pullback and that should provide some tailwind for the US economy at a time when it’s needed – and it might be refreshing for those that want to buy houses,” he added.

“In general, I expect rates are going to be lower into next year. I don't think that the 10-year is going to get above 5%. So we're approaching a pretty good risk-reward for those that want to buy Treasuries, I think.”

Lee did not voice an opinion about the yields in the near or intermediate term, but he did point out that although many equity investors view higher yields with trepidation due to what they might do to P/E, these fears are not entirely justified. “Since 1930, a 4.5% US 10-year yield has not necessarily been a P/E killer,” he observed. “In fact, the ‘sweet spot’ for P/E is 3.5% to 5.5% yields which have seen an average P/E of ~20X. US yields below 3.5% are actually associated with lower P/E.”

A note on Energy

“We've seen a little bit of evidence of crude getting extended and starting to roll over,” Newton said. “I think crude is close to short-term peaking out, and that means that Energy likely is not going to be the best group over the next three to six months. But really any pullback in Energy would be something I would buy into. Next year should be the time when crude gets up above 100. And I do think that is going to happen.”

Elsewhere 

The Bank of England paused its rate hikes for the first time since December 2021, opting to leave them at 5.25%. Commenting on the decision, BoE Governor Andrew Bailey acknowledged that “inflation has fallen a lot in recent months, and we think it will continue to do so.” Meanwhile, Sweden’s Risbank and Turkiye’s central bank both hiked rates this week to combat high inflation, to 4% and 30% respectively.

Amazon announced that it planned to hire 250,000 seasonal workers to help manage the winter holiday surge in orders, an increase over the 150,000 figure it hired during the 2022 holiday season. The company also announced slight hourly wage increases for seasonal, part-time, and full-time employees in its warehouse and delivery units.

Toyota announced a breakthrough in AI-powered robotics, with robots that can learn new “dextrous skills” purely through observation and demonstration, rather than coding. The Toyota Research Institute said its robots can now learn by using telemetry and robot vision to observe a human demonstration, then applying generative AI to acquire new skills such as using tools, pouring liquids, and even preparing simple breakfasts. (For example, robots learned to spread Nutella on bread, use an egg-beater, and flip pancakes.) Toyota’s new technology was facilitated by also giving the robots a sense of touch, so they need not rely solely on visual data.

Chevron has reached an agreement with workers at its Australian liquified natural gas facilities, concluding talks that began on September 8. The facilities account for 5% of global LNG production. 

Japan’s population continues to age, with the over-80 demographic now making up more than 10% of the population for the first time. In addition, 29.1% of Japan’s population is 65 or older. (For reference, in the US about 16.8% of the population is 65 or older.)

And finally: A Copenhagen court has ordered artist Jens Haaning to repay the Kunsten Museum of Modern Art for the DKK 532,549 (USD $76,400) in currency it lent to him after he delivered two blank canvases he titled “Take the Money and Run” instead of the two pieces the museum had commissioned. The museum had been under the impression that Haaning would use the cash to create artistic commentary about wage disparities within the European Union. Haaning told reporters that he no longer has the money. 

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