“All courses of action are risky, so prudence is not in avoiding danger (it is impossible), but calculating risk and acting decisively.” ~ Niccolo Machiavelli

Good evening,

Treasury yields continued to climb this week, with the US 10-year reaching 16-year highs. On Friday, it rose above the 5% level for the first time since 2007, albeit briefly. This had the expected effect on markets, with all three major US indices closing sharply down. 

Equities actually climbed slightly on Monday, even with yields rising, causing Fundstrat’s Head of Research, Tom Lee, to observe that “the correlation between rising yields and falling stocks seemed to have momentarily disconnected.” Lee viewed this as a temporary condition, however, noting that “in the short term, I’m not sure this will be a stable dynamic.”

Head of Technical Strategy Mark Newton also questioned whether this would continue, but similarly observed that “when you look at the correlation now between equities and Treasuries, which had been very, very strong – they're starting to split a little bit.” Although the markets ultimately fell on Friday and closed the week lower, Newton noted during our weekly research huddle that “the move up in rates has not really adversely affected the stock market as much as it did in recent weeks or months.”

“We'll see if that continues,” he said. “The combination of deficit spending, ongoing supply, and better-than-expected economic reports across the board has caused yields to continue to spike,” while, “the key for the stock market to truly get on better footing is going to be for yields to really break this big uptrend. That means getting down below about [4.37%], and that’s going to take some time.”

“The cycle that I have for interest rates shows that we might pull back a little bit, but I still think we're probably about a month away from when rates are really starting to peak out,” he told us. 

They certainly didn’t peak out on Thursday, the day of  Powell’s speech. “Powell’s statements were actually dovish when it comes to monetary policy,” Lee said, buttressing his opinion by pointing out the subsequent collapse in the probability of a Fed hike by December, as implied by Fed Funds futures trading activity. The odds fell to around 25%. “That’s a new low for 2023 – it was as high as 55% in early October,” he noted. We can see this in our Chart of the Week:

Nevertheless, 10-year and longer-term yields rose even more after Powell’s remarks, and Lee attributed that to Powell’s response to questions about the reasons for the ongoing surge. Powell’s response? He ruled out expectations of higher inflation and shorter-term Fed policy moves as potential causes, but also said: “I think it's appropriate to have a little bit of humility. It's always hard to say exactly what's going on with longer-term yields.” 

Lee said, “It’s hard to disagree with that, but along with his comments about how the Fed will have to assess how to move forward even after inflation falls to 2%, it didn’t leave the markets feeling very good.” 

In Newton's view, it could have been worse. “Despite ongoing dysfunction in Washington, and now a second major war, equities have really been relatively unscathed. That’s really thanks to Technology, along with Financials, which have kicked into gear.”

With regard to Financials, Newton pointed out that “Insurance has been the driver. We've seen big breakouts in the entire insurance sector just in recent days, and that’s one of the reasons why I liked Everest (EG 1.20% ) being included as a Super Granny. I think this group is still going to do very very well for the next three to six months.”

About the US 10-year

As noted above, the yields for the US 1o-year rose this week and briefly breached the 5% mark on Friday. Is there significance to the 5% number? Newton said that from a technical perspective on markets, “it’s psychologically important.”

Lee didn’t disagree with that, but noted, “There’s nothing magical about 5% on a 10-year, except that it's uncomfortable and it's a round number. Still, for equity markets, approaching 5% has simply reached the point where equity buyers are stepping aside – especially when coupled with uncertainties around Israel-Gaza and the political circus in Washington.”

Elsewhere 

The median net worth of U.S. households grew 37% to $193,000 between 2019 and 2022 (adjusted for inflation), according to the Federal Reserve’s Survey of Consumer Finances.  

The Biden administration continued to tighten rules related to China’s access to advanced semiconductor and AI technologies. The new restrictions include exports of advanced semiconductor-manufacturing equipment and expand all related restrictions to any country for which the U.S. has an arms embargo. In a move seen by some as retaliatory, China announced restrictions on the export of graphite, which is a key material in electric-vehicle batteries. 

The United Kingdom saw core inflation fall slightly to 6.1% in September, from 6.2%.

The former chairman of the Bank of China was arrested over allegations of bribery and illegal loan activity, the latest in Chinese President Xi Jinping’s anti-corruption efforts targeting the country’s financial sector. Liu Liange headed the bank from 2019 until March 2023. 

China’s GDP grew at an annualized 4.9% in the third quarter, beating expectations of 4.5% but dropping significantly from the 6.3% seen in the second quarter. Consumer spending helped drive Q3 growth, with retail sales up 5.5% in September.