(USTs extend modist bid, curve flatter on average volumes)while WE slept; MATH of the moment: ADP + TBAC + ISM + FOMC = X; lower dur supply+higher labor supply=X (solve for "X"s); "Give Car Back"

Good morning … ADP + TBAC + ISM + FOMC = strong bid for bonds …

… and ONLY words of caution might be from momentum — you can see the line etched in on bottom panel / stochastics — suggesting we’ve moved quickly from cheap to rich. This is what happens when it was the … best day for 10yr bonds …

… it was the best day for US Treasuries since March (10yr yield down -19.7bps) as a dovish leaning FOMC outcome reinforced an already strong rally driven by the Treasury’s refunding announcement and weaker US data.

DBs early morning JIM REID (below) … and for somewhat MORE context in a single AT KGREIFELD TWEET

10y fall *20bp* today

biggest drop since March

I was looking at charts and the longer-end of the curve yesterday still well within defined UPTREND and searching through other on-the-runs noticed the 10yy which ALSO in an UPtrend … little bit different look and just the other day I was saying to myself the 10yy had to show me something for me to believe … and so, that is exactly what it did YESTERDAY. That was then and this is now.

IS this the something shown? Dunno, to be honest. Everyone continues declaring the Fed DONE and the economy about to roll over and play dead … this at the same time the Fed themselves have left door open TO further HIKES … and so, in days / weeks ahead we’ll once again be told to embrace the … ‘hawkish hold’?

Seriously? More likely than not … YOU decide but for now, i’ll read as much as I can and let price action be ultimate arbiter of the truth … and so in somewhat reversed order,

BMO: Weak ISM Stokes Treasury Rally

… Treasuries were solidly bid ahead of the data as a result of the Treasury refunding details and since the new information, yields have fallen further with the curve pushing toward greater inversion…

ZH: Manufacturing Surveys Scream Stagflation: Inflation Accelerated, Demand Muted, Jobs Cut For First Time Since COVID

… Sure enough, S&P Global's US Manufacturing PMI printed 50.0 final for October (in line with the flash print and expectations and up slightly from September's 49.8). But, ISM's Manufacturing survey printed well below expectations (46.7 vs 49.0 exp vs 49.0 exp)...

ADP MISSED and that helped steady stocks / bonds for a bit ahead OF TBAC and QRQ …

ADP Employment Report - ADP National Employment Report: Private Sector Employment Increased by 113,000 Jobs in October; Annual Pay was Up 5.7%

ZH: ADP Employment Report Signals Continued Wage Growth Decline

… THEN Treasury Quarterly Refunding Announcement hit (Mike’s face just about says it all)

ZH: US Treasury Reveals Lower Than Expected Rate Of Debt Sales In Quarterly Refunding Plan; Yields Slide

AND from horses mouth …

Treasury - Quarterly Refunding Statement of Assistant Secretary for Financial Markets Josh Frost (i’ll attempt to highlight what I think markets heard / saw at 830 which seemed to have FIT — yields dropped and stocks popped…)

… PROJECTED FINANCING NEEDS AND ISSUANCE PLANS

Based on projected intermediate- to long-term borrowing needs, Treasury intends to continue gradually increasing coupon auction sizes in the upcoming November 2023 to January 2024 quarter.  As these changes will make substantial progress towards aligning auction sizes with projected borrowing needs, Treasury anticipates that one additional quarter of increases to coupon auction sizes will likely be needed beyond the increases announced today.  Treasury issuance plans will continue to depend on a variety of factors, including the evolution of the fiscal outlook and the pace and duration of future SOMA redemptions. 

NOMINAL COUPON AND FRN FINANCING

Treasury plans to continue with gradual nominal coupon and FRN auction size increases, but at a more moderate rate in longer-dated tenors…

… Treasury plans to increase the auction sizes of the 2- and 5-year by $3 billion per month, the 3-year by $2 billion per month, and the 7-year by $1 billion per month.  As a result, the auction sizes of the 2-, 3-, 5-, and 7-year will increase by $9 billion, $6 billion, $9 billion, and $3 billion, respectively, by the end of January 2024.

Treasury plans to increase both the new issue and the reopening auction size of the 10-year note by $2 billion and the 30-year bond by $1 billion. Treasury plans to maintain the 20-year bond new issue and reopening auction size…

AND from the TBAC (Treasury Borrowing Advisory Committee (so, Global Wall Street who’s tasked with facilitating all these auctions,

Treasury - Minutes of the Meeting of the Treasury Borrowing Advisory Committee October 31, 2023 (talkin shop and SUPPLY and DEMAND)

… The Committee reviewed a presentation on the recent drivers of market moves across the Treasury yield curve over the last quarter. The presenting member noted that the increases in yields have occurred primarily in longer maturities, driven by a possible reassessment of the long-run neutral rate and higher term premia.  The presenting member highlighted an upward trend in several estimates for the long-run neutral rate.  The presenting member also discussed a range of potential explanations for the increase in term premia, including various supply and demand dynamics.  The Committee discussed several aspects of the presentation, including recent deficit trends, asset class correlations, and changes in monetary policy expectations.  The presenting member concluded that there is a high degree of uncertainty regarding the outlook for yields going forward. 

The Committee then turned to a presentation on the outlook for demand for Treasuries.  The presenting member discussed recent shifts in the demand base, such as a move toward more price sensitive investors, and the extent to which these shifts may be cyclical or structural.  Over the medium term, the presenting member expected demand from mutual funds, pension funds, and money market funds to increase, with demand from banks and foreign investors to be more limited.  Despite this shift, the presenting member noted that Treasury auctions have continued to be well subscribed.  The presenting member further noted that the future evolution of demand will depend on the global macroeconomic outlook.  The presenting member concluded by recommending Treasury approach future issuance decisions with greater flexibility within the construct of regular and predictable issuance.  Committee members discussed relative demand at different tenors and the degree of flexibility to consider in its recommendations to Treasury.

… so, there we have it — some meat on the bones — DETAILS) is above and for your dining and dancing pleasure (and in the case you have any trouble sleeping at night)!

Side note - I used to read ALL these things cover to cover, before AI did it for us all and attempted to search / find any nuance which could be exploited … and digest / pass along a view via IM on Bloomberg helping keep FI managers and traders alike, in the know and on right path … NOW, just hunting and gather / copy and pasting for MY OWN betterment (?).

AND finally, Druck was on CNBC yesterday following any one of the versions of story — certainly one of most read on Tuesday with Bloomberg’s version noted HERE — and so as he sat down on CNBC to offer context … here you go,

CNBC - Stanley Druckenmiller says government needs to stop spending like ‘drunken sailors,’ cut entitlements

… here is a snapshot OF USTs as of 705a:

… HERE is what this shop says be behind the price action overnight…

… WHILE YOU SLEPT
Treasuries have modestly extended their gains with the curve pivoting flatter off a little-changed front-end. DXY is notably lower (-0.65%) while front WTI futures are higher (+1.3%). Asian stocks (ex-China) followed NY higher, EU and UK share markets are all in the green (SX5E +1.7%) while ES futures are showing +0.5% here at 6:50am. Our overnight US rates flows saw further belly out-performance during Asian hours with much of the flow there appearing to be in futures. Around the crossover, belly sellers emerged to fade the extremes (2s5s10s in particular) with some noting a reluctance to chase prices higher ahead of next week's refunding supply. Overnight Treasury volume was ~ average all across the curve.

… the next weekly chart of Treasury 5yrs shows why we think it's only a small risk that 5y yields return to trend from below. That's because we now see weekly momentum rolling bullishly (after being pinned at a deeply oversold reading for some months) and we're expecting tomorrow's closes to confirm the medium-term momentum shift. If confirmed, it won't take much of a rally, or more time at lower rates, to flip long-term momentum (not shown, yet) bullishly too.

AND more … Check out TLT visual (and then compare / contrast TO the one I mentioned at end of YESTERDAYS NOTE :)) … and for some MORE of the news you can use » The Morning Hark - 2 Nov 2023 and IGMs Press Picks (who CONTINUES to be sportin’ that new, fresh look) in effort to to help weed thru the noise (some of which can be found over here at Finviz).

Moving from some of the news to some of THE VIEWS you might be able to use… here’s SOME of what Global Wall St is sayin’ … LOTS here to talk about from ADP to QRA and some more …

BAML - Rate hike impact slow with locked in debt (LOCKED IN? read all ‘bout it…but generally speaking, NOT what you thought they were writin’ about AND so, not a global macro narrative note but one about credit markets specifically … )

Lock-in effect means longer monetary policy lags
The US economy has proven surprisingly resilient to Fed tightening. Activity surprised to the upside and rates exceeded our forecasts. Part of the story is that a large share of consumers and businesses are locked into low borrowing rates, blunting and delaying the impact of Fed hikes. Limited refinancings may create a lag that does not meaningfully impact borrowers until late ’24 – early ’25. We discuss the outlook for economy / rates & “higher for longer” impact on mortgages, IG, HY, leveraged loans, CLOs, & equities.

Mortgage & IG higher rate impact = limited

HY/loans = bite to grow; stocks = own low equity duration

Bottom line: low rollovers have blunted higher rate impact
A more resilient US economy will mean higher rates for longer. The higher rate impact will be most quickly felt by the US Treasury, high yield, & loan markets. Mortgage & IG borrowers face a longer lag. Equity returns can still exceed rates, especially for firms with high near-term cash flows & “low equity duration”.

… US Rates: The US rates market has recently re-priced meaningfully due to a combination of (1) improved US growth (2) acute UST supply / demand imbalance (3) some offsides asset manager positions. The rate move has been exacerbated by a Fed near done hiking & a market that increasingly removing Fed cuts.

The Treasury market has meaningfully overshot our base case rate UST forecasts. Our forecasts were previously skewed in the direction of higher front-end rate due to a Fed that would keep raising rates into Q4 ’23 & then hold higher for a longer period of time. We had end ’23 2Y & 10Y forecasts at 4.75 & 4.00%, respectively. The market is likely to realize well above our forecasts that previously implied a modest US growth slow down.

We believe the market is placing much greater weight on a more resilient US economic outlook, expecting a much higher trough in the Fed cutting cycle, & likely building in a premium for the UST supply / demand mismatch. US rates will stop rising once there are clearer signs that they are becoming sufficiently restrictive via (1) economic moderation (2) risk asset struggles. The rate rise can also slow once the curve dis-inverts.

We don’t know where rates will peak but certainly can’t rule out 10y rates at or above 5% (see our report, Are 10yT cheap?). We suspectthe 10y rate rise will be slower at or above 5% to (1) increased negative feedback from risk assets (2) market desire to still hold some Fed rate cuts. In the extreme, we suspect the market will see value in extending out the curve once the overnight to 10Y curve dis-inverts on the expectation that these recently high rates levels are unlikely to sustain themselves over 10-30Y.

The impact of higher rates for the US government is meaningful and will be felt via higher interest payments & larger deficits. Currently, the UST weighted average coupon for coupons (excluding floating rate notes & bills) is around 2.1%. These costs are expected to increase with higher rates, especially since 22.6% of all UST debt is floating (including bills & floaters) and 30% of coupons will be refinanced by end ’25.

Higher US interest costs will comprise an increasingly large portion of the US budget. The Congressional Budget Office reports over the past 50Y the average interest cost to GDP has been 2%. CBO projects these costs are likely to be 2.5% in 2023, rise to 3.6% by 2033, and reach 6.7% by 2053 (by 2053 interest expense will be larger than social security payments). We see upside risks to the CBO numbers (see our report, Interest expense boosts deficit & supply forecasts). Interest costs naturally increase with higher rates.

Interest costs are likely to rise meaningfully for the US government in coming years. The US government will feel the impact of higher rates via larger sustained deficits. Unless there are deficit reduction measures higher US rates & a steeper UST curve is likely to persist. Higher rates will eventually moderate US economic activity, though the timing is uncertain …

Barclays - September JOLTS: No sign of slowing yet (time to cut rates … ?)

Job openings increased for a second consecutive month, to 9.6mn, suggesting the demand for labor is still plentiful, amid a steady hiring rate and a slight dip in the rate of layoffs. This leaves the ratio of vacancies to unemployed unchanged at 1.5. All told, the data suggest momentum in labor markets remain firm.

Barclays - Manufacturing ISM retraces September firming

The latest ISM manufacturing composite returned to a range it had occupied for earlier in the year after having firmed unexpectedly in September. The latest readings continue to point to contractionary conditions in the manufacturing sector, which remains at odds with the ongoing hard data on factory production.

Barclays - November FOMC: Wishful thinking

The FOMC kept the policy rate unchanged in the face of a recent tightening in financial conditions, but maintained a tightening bias for its policy rate, as expected. During the press conference, a dovish Powell suggested the FOMC might be done with rate hikes, raising the risk it will need to do more later.

BNP - US rates: Slower pace of long-end increases only modest supply relief

KEY MESSAGES

• Treasury announced another round of increases to auction sizes at the November refunding, but opted to temper the pace of long-end increases in a manner close to our expectations.

• We expect one more round of auction size increases in February, but look for a downshift to the hikes for nominal 2s and 5s paired with an increase in 20s (held unchanged today) and the same pace of adjustment for the rest of the curve.

• The below-consensus long-end adjustments do not materially change the trajectory towards record duration supply, which we think should sustain the reset higher in term premium and headwind to swap spreads.

… Given our deficit estimates and a TGA target of $750bn, we expect net coupon supply, net of QE/QT to reach $355bn in Q4 2023 and $1.84tn in CY2024. Adjusting supply by DV01, we expect monthly duration supply to the market to reach an all-time high with nearly $240bn/month in 10y equivalents by mid-2024.

Bloomberg BNP - US November FOMC: Fed sounds content, despite tightening bias

KEY MESSAGES

• Our read of the communications around the FOMC meeting is that the Fed sounds increasingly confident it has reached the terminal fed funds rate for the cycle.

• While Chair Powell left a nominal tightening bias in place, his comments sounded content with the current stance given the ongoing, albeit lumpy, improvement in labor and inflation conditions.

• While the Fed has nominally kept open the possibility of further tightening, we remain of the view the Fed has reached the terminal fed funds rate for this cycle at a 5.5% upper bound.

CitiFX Techs - As The Sun Rises: 2yr yields' shaky footing

US 2yr yields: Post the refunding announcement, US yields have collapsed below the 5% psychological support level, in addition to the pivotal 55-day MA.

This adds conviction to our  view of a 55-200 day MA setup (we had been earlier concerned about false breaks). We now think we could see a further 30bps move lower towards the 200-day MA in the medium term. This would also support a bull steepening move in Treasuries.

Next levels to watch: 4.92% and 4.75% (October 10 and September 1 lows respectively) …

… 2y yields had seen a weekly close below 55-day MA last week (for the first time since May 2023), setting up the 55-200 day MA setup with a formation indicated target of the 200-day MA

… 2y yields now close below the psychologically significant 5% level, and opens up further moves lower

2y yields will find interim support at 4.92% and 4.75% (October 10 and September 1 lows respectively)

The bond turn

DB - November refunding thoughts: Swallowing the bitter pill

As we had anticipated, the Treasury delivered a second round of coupon size increases but moderated the pace for long-dated maturities compared to August. Consistent with a market pricing of larger increases to the longer maturities before the announcement (which was the dealer consensus), the immediate market reaction was a bull flattening and long-end swap spread widening…

… Importantly, investors are likely also encouraged by the Treasury’s statement that it anticipates “only one additional quarter of increases to coupon auction sizes”. This is different from the statement in August, where it said that further coupon increases are likely needed “in future quarters”, which could be interpreted as these increases potentially extending into late next year…

… The new statement language leads us to pull forward the anticipated May-July 2024 increases into the February-April period. Relative to our earlier forecast, the expected net coupon issuance and the duration supply in ten-year equivalents for 2024 are still very similar.

DB - FOMC: Sustained sell off needed to sell Fed on "sufficiently restrictive"

• As expected, the Fed held rates steady and Chair Powell's recent comments served as a blueprint for his press conference. Powell kept the door open for a rate hike in December and beyond, noting that the Committee is not confident they have achieved a "sufficiently restrictive" stance. At the same time, he also repeated that financial conditions have tightened "significantly" and that, if this is sustained, it could substitute for further rate increases. On the dovish side, Powell did not sound perturbed by recent data strength, likely reflecting concerns around tighter FCIs and a desire to see more data to determine if these trends are sustained.

• Our baseline remains that the Fed is done raising rates. This expectation requires evidence of a moderation in growth and labor market data, especially in the face of somewhat firmer inflation prints, as well as financial conditions remaining tight or tightening further. In the absence of these developments, we continue to see heightened risk that the Fed will need to raise rates again in December / Q1, and conditional on that outcome, that rates could need to rise further than currently signaled (see "Dovish arguments are dicier when the data don't cooperate").

DB - Early Morning Reid

… it was the best day for US Treasuries since March (10yr yield down -19.7bps) as a dovish leaning FOMC outcome reinforced an already strong rally driven by the Treasury’s refunding announcement and weaker US data. A softening of the Fed’s tightening bias and the bond rally supported equities, with the S&P 500 (+1.05% yesterday) seeing its strongest three-day rally since late March. I wonder whether the seasonals are also kicking in. As we showed in our CoTD last Friday (link here), that day (October 27th) is on average the low point for the S&P between July and October. After that markets on average rally. The next big events are the BoE today and Apple earnings after the closing bell tonight before payrolls tomorrow.

FirstTrust - The ISM Manufacturing Index Declined to 46.7 in October

… Implications: Activity in the US factory sector contracted in October and has done so every month in the last year. We continue to believe a recession is lurking ahead and the details of today’s report suggest the goods sector of the economy is likely to lead the way…We expect Friday’s payroll report to show a nonfarm payroll gain of 177,000. Finally, in recent housing news, the national Case-Shiller index rose 0.9% in August while the FHFA index rose 0.6% and both show home prices at a new all-time high. Notably, these indices sit 4.4% and 7.5%, respectively, above March 2022 (when the Federal Reserve began their current tightening cycle) after a brief drop in the second half of last year, indicating this is not a repeat of 2008.

FirstTrust - Research Reports - Pause…For Now

… It remains to be seen how quickly the reductions in the money supply will translate into inflation getting back to the Fed’s 2.0% target, but the Fed has gained some traction against the inflation problem. Given time, the mission can be accomplished, but the Fed must remain patient. One of the biggest risks in the year ahead is the Fed jumping the gun on cuts should economic conditions deteriorate.

For now, each FOMC meeting remains “active,” meaning the Fed is ready to raise rates further if the data suggests more work to be done. But without a clear path forward the looming geopolitical tensions, resumption of student loan payments, slowing economic and employment growth, and higher oil prices could make the Fed’s path bumpy. History may show that the Fed finished rate hikes in July, but it will still be a while before they can call their mission complete.

Goldilocks - ADP Employment Increases Less Than Expected in October

BOTTOM LINE: According to the ADP report, private sector employment rose by 113k in October, 37k below consensus expectations. We do not place much weight on the ADP miss because of ADP’s negative correlation with BLS private payrolls since the introduction of the new methodology. We left our nonfarm payroll forecast unchanged at +195k ahead of Friday’s release.

Goldilocks - November 2023 Refunding Recap

The November refunding meeting surprised markets; Treasury slowed the pace of increases at longer tenors, even as it maintained the current pace at shorter tenors. 2y and 5y auction sizes were raised by $3bn per auction, and there was no increase in 20y auction sizes. Other announced auction sizes were in line with our expectations, as was the overall monthly duration supply. The latter was about $4bn-$6bn in 10y equivalents/month below many investor estimates, resulting in bull flattening of the yield curve.

We project another round of auction size increases at the February 2024 refunding meeting, after which we believe sizes will remain stable for some time. The pace of increases in that cycle will likely match that seen in the current refunding cycle, though Treasury could make marginal adjustments.

Somewhat surprisingly, Treasury continues to target elevated cash balances, more than we believe necessary, especially given costs. The higher $750bn cash target implies greater bill issuance in 4Q23 (~$420bn) than we previously estimated, though we expect bill supply to decline materially beyond the first quarter of next year.

Goldilocks - ISM Manufacturing Below Expectations, Job Openings Above; Construction Spending in Line with Consensus; Boosting GDP Tracking

BOTTOM LINE: The ISM manufacturing index decreased below expectations in October. The composition of the report was weak, with declines in the new orders, production, and employment components. Job openings increased by 56k to 9,553k in September from a downwardly-revised level of 9,497k in August, against expectations for a decline. We have previously noted that the low response rate is likely to increase uncertainty and introduce upward bias to the JOLTS measure of job openings, and alternative measures of job openings continued to decline in September. After incorporating today’s JOLTS data, our jobs-workers gap based on the JOLTS, Indeed, and LinkUp measures of job openings stands at 2.6mn workers in September. Meanwhile, nominal construction spending increased in September, in line with consensus expectations, while growth was revised up in August and down in July. The details of the construction spending report were stronger than our previous assumptions. We launched our past-quarter GDP tracking estimate for Q3 at +5.2% (qoq ar), compared to +4.9% as originally reported. We also boosted our Q4 GDP tracking estimate by one tenth to +1.7% (qoq ar) and our Q4 domestic final sales growth forecast by two tenths to +1.7%.

Goldilocks - FOMC Keeps Funds Rate Unchanged, Acknowledges Recent Tightening in Financial Conditions

BOTTOM LINE: The FOMC left the target range for the federal funds rate unchanged at its November meeting. Only modest changes were made to the post-meeting statement’s characterization of the current state of the economy. The statement was updated to acknowledge the recent tightening in financial conditions—which several FOMC participants have suggested could substitute for further policy tightening—noting that tighter financial and credit conditions “are likely to weigh on economic activity, hiring, and inflation.”

Goldilocks - November FOMC Recap: Dovish at the Margins

… We saw the FOMC statement and the press conference as slightly dovish overall, and the market appeared to agree. First, the FOMC statement acknowledged the recent tightening in financial conditions, and Chair Powell laid out conditions that seem likely to be met under which the tightening would displace the need to hike. Second, Powell clarified that above-potential growth on its own would not be enough to warrant another rate hike and added that potential growth is currently higher than usual because labor force growth is elevated. Third, Powell downplayed the 1pp jump in one-year Michigan inflation expectations, a somewhat concerning recent data point, and said, “it’s just clear that inflation expectations are in a good place.” …

JEFF - Nov Refunding Review: Coups Bumped Higher With Focus on Short- and Medium-Duration, Prudent Reduction in Bills Upcoming

■ Treasury announced increases in coupon auction sizes for the coming quarter, with a somewhat heavier weighting towards maturities of 5 years and in. Aside from these shifts in the weighting, which are relatively small in the grand scheme, the announcement was as expected.
■ Alongside the increased coupon issuance, Treasury bill issuance is going to level out in the coming months. Based on findings from the TBAC, Treasury may be motivated to reduce bills as a percentage of outstanding debt into mid-year.

JEFF - FOMC Leaves Rates Unchanged Once Again, Offering Subtle Hint That They May Be Done With Rate Hikes

Key Points
■ The Fed left all target and administered rates unchanged, as expected.
■ The policy statement was once again little changed from September. Word substitutions were few, but the addition of a reference to "financial" conditions in addition to "credit conditions" as potential causes for more drag on activity may be a hint that rate hikes are done.
■ Powell had several opportunities to threaten another rate hike, but passed on most of them. The answers to the questions from the press were consistent with the high level of uncertainty about the outlook, and about how much lagged tightening is still in the pipeline from previous moves.

LPL - Strong Seasonals Return After Red October

… In summary, though somewhat mixed, overall historic stock market seasonals are still pointing to a supportive environment for stocks coming into the year-end. Three consecutive months of selling pressure may have also exhausted sellers and left stocks approaching oversold levels. We do maintain our outlook of a slight preference for fixed income over equities in our recommended tactical asset allocation (TAA), but this is more a function of fixed income valuations remaining relatively favorable over equities due to their attractive yields. We see this as a reason to temper enthusiasm for equities, but not to be bearish, remaining neutral, sourcing the slight fixed income overweight from cash, relative to appropriate benchmarks.

MS - FOMC Reaction: Comfortable and Balanced (math…)

On balance, the door to a December hike remains ajar, even as support on the Committee has waned. We do not see the data and financial conditions supporting further tightening. Our strategists add 3m30y ATM -25 receivers, and stay long SFRZ4 on SFRU3Z4Z5 fly, and long agency MBS.

… Lower Duration Supply + Higher Labor Supply = Long 3m30y Receivers

MUFG - The “Higher for Longer” Paradox (Goncalves — one of the better ones ‘out there’ and saying that despite or BECAUSE of a continued and more BEARISH VIEW…)

In our view, the Fed’s “higher for longer” (HFL) view is inconsistent with a soft landing as a) it ignores the long and variable lags of tightening,b) it suggests higher restrictive rates will not impact the economy (why hike then?), and c) it assumes they’ll slow walk cuts (historically they cut fast when facts change).

The HFL stance also has a number of embedded conditions that need to be held constant in order for the Fed to maintain rates at restrictive levels(and still achieve a goldilocks scenario). Such conditions are: the jobs market will remain tight for the foreseeable future, there won’t be any major financial accidents in the future, and global uncertainty does not worsen from here.

Yes, we understand that the immediate focus remains getting inflation close to target, but the focus can, and likely will flip to growth concerns. If the Fed waitsfor a signal to cut, sadly it might come too late. The HFL premise turns into a paradox if they don’t proactively lower rates. In other words, waiting for undeniable proof, while keeping rates high, increases recession odds.

Our framework has been built upon, contrary to some narratives,the novel notion that high rate levels matterfor a leveraged economy. So long as L/T rates stay where they are (or higher) in the 5yr+ sector, interest rate sensitive sectors like autos and housing will start to impact US growth.And if L/T rates maintain a positive term premium too (due to deficits/large supply), the UST market will crowd out credit and compete with equity markets as well.

In order for us to change our bearish views, we would need the Fed to cut soon (low chance), bold and coordinated easing efforts from China (a big maybe), and a peaceful end to ongoing wars (sadly this seem unrealistic at this point). However,this idea that the US is an island and can maintain sustainable organic growth with high debt loads & high rates is not probable.

… Another key factor that will likely keep TP above zero until the next recession hits is the fact that the BoJ is slowly, but surely, reversing its ultra-accommodative policy. As seen in Figure 5, in the prior decade low global L/T rates led to negative TP in USTs, thus if that is reversing, TP should stay positive if Global QE is finally over.

Nordea - FOMC Review: Unsure (honest)

The FOMC kept rates on hold but seems quite unsure about the right path for the Fed funds rate ahead. Markets are jubilant and believe the Fed is finished hiking.

UBS (Donovan) - Sense, at last

The Federal Reserve left interest rates unchanged—surprising no one. There was no apology for past policy errors or the unnecessary risk premium created by Powell’s lack of a policy framework, but Fed Chair Powell finally seemed to acknowledge this might be the rate peak. Bond markets rallied. Let speculation about rate cuts begin…

UBS - ISM falls. Job openings and CPIP rise.

ISM manufacturing composite falls 2.3 points to 46.7 …
Job openings move up in October …
Construction spending slowed a touch …

UBS - FOMC: Proceeding carefully

… December could be a live meeting
As we expected, when asked about the December FOMC meeting, he did not rule out hiking further, highlighting the data flow between now and then. Chair Powell said no decision had been made on December and specifically rejected the idea that after pausing for a few meetings it would be difficult to restart rate hikes. "The Committee will always do what it thinks is right," he said.

"We are looking at the broader picture, what is happening with our progress toward the 2% inflation goal. Is the labor market continuing to broadly cool off and achieve a better balance? We will be looking at that. We look at growth...and broader financial conditions, so we will look at all those things as we reach a judgment, whether we need to further tighten policy. If we do reach that judgment, we will tighten policy." - Chair Powell, November 1, 2023

Rise in yields helps but it depends
Chair Powell acknowledged the yield rise and tightening in financial conditions in a pretty standard way, saying they look at a range of indicators, and he avoided taking a strong stand on what the impact would be, either on the economy or policy …

… Broader takeaways: watch the data to assess the future reaction

Wells Fargo - FOMC Appears To Be in "Hawkish Hold" Mode

Summary

• As widely expected, the FOMC decided to keep rates on hold at today's policy meeting. The decision to maintain the target range for the federal funds rate at its current level was unanimously supported by all 12 voting members of the Committee.

• The FOMC also maintained its current pace of quantitative tightening.

• The post-meeting statement continued to characterize inflation as "elevated." Additionally, the Committee maintained that "additional policy firming" may be "appropriate." In short, the FOMC is keeping open the door to hiking rates again if economic and financial developments warrant.

• This is the third time in the past four policy meetings that the FOMC has decided to maintain its target range for the federal funds rate at its current level rather than lift it further.

• It seems to us that the FOMC is now in "hold" mode, albeit in a hawkish way, rather than simply on "pause." That is, we think the bar to further rate increases is higher now than it was a few months ago.

• We forecast that the FOMC will remain on hold through most of Q2-2024, which is more or less consistent with market pricing. But the stance of monetary policy, as measured by the real fed funds rate, likely will become more restrictive in coming months as inflation slowly recedes back toward target but as the FOMC keep the nominal fed funds rate on hold.

WisdomTree - Fed Watch: In a Holding Pattern (Flanagan formerly of MS …)

… The Bottom Line
Regardless of whether the Fed is now officially done or not from a rate hike perspective, the end result of this cycle will be that interest rates are now at levels a generation of investors has not witnessed before, potentially ushering in a rate regimen that harkens back to pre-financial crisis times. Against this backdrop, investors have a whole new dynamic to consider in their fixed income portfolio decision-making process.

Yardeni - Halloween Is Over. Is Santa Here Already? (bottom is IN <stocks> says the good doctor…?? well, at least it’s POSSIBLE … )

It's possible that the S&P 500 bottomed today. Bond King Jeffrey Gundlach appeared on CNBC following Fed Chair Jerome Powell's presser and opined that the entire yield curve looked attractive, at least for a trade. We agree. He also observed that the S&P 500 might have found support at its uptrend line connecting the lows of March 23, 2020 and October 12, 2022 (chart). We agree.

… And from Global Wall Street inbox TO the WWW,

Bloomberg - Janet, Jay, Kazuo and the mysteriously falling bond yields (Authers OpED)

Yields Begin to Yield
US Treasury bonds form the largest, most liquid and important securities market on the planet. Many things move it, but nothing can change it unaided. Bear this in mind on a day when two of the three institutions with the greatest power to shift it — the Federal Reserve and the Treasury Department — acted only hours after a big announcement from the third, the Bank of Japan, whose massive interventions in its own bond market have pressed on yields across the world. There was also the customary heavy download of data that comes at the beginning of every month. 

The net result for US bonds was a huge rally, with the benchmark 10-year Treasury yield falling 17 basis points by the close of trade in New York (and further in Asian trading). This is how the day unfolded, with interventions from Janet Yellen of the Treasury and Jay Powell of the Fed marked:

Meanwhile, the stock market took heart from lower rates, having endured gyrations in the aftermath of the Federal Open Market Committee meeting:

But it’s important not to get too carried away. Bond yields are in an historic surge that many believe is overdone. This reverse only leaves them well within a clearly upward trend:

…

Bloomberg - 5 things to start your day (EZ edition for a ROC look at financial conditions)

… Looking at the three-month change in the GS index is quite revealing. Conditions have not changed as quickly as they did last year, but again — we’re in a different part of the cycle. What’s notable is that conditions have recently tightened more quickly than they did at any point during the 1990s.

Given where we are in the cycle, it’s reasonable to think that an ongoing tightening will induce some sort of reaction eventually. A further rapid tightening would clearly not be as welcome moving forward as it was a year ago.

WolfSt: Another “Hawkish Hold” with Tightening Bias: Fed Keeps Rates at 5.50% Top of Range, Rate Hike Still on the Table. QT Continues

WolfST: “We’ll Probably Still Be Left with Ground to Cover to Get Back to Full Price Stability”: Powell at the FOMC Press Conference

WolfSt: Tsunami of Treasury Issuance Shifts from Longer-Term Debt to Short-Term T-Bills & 2-Year Notes amid Intense Navel-Gazing about Spiking 10-Yr Yield

ZH: Fed Remains 'Paused', Acknowledges Tightening Financial Conditions Are 'Doing Its Job'

ZH: The Party's Over: Atlanta Fed Slashes Q4 GDP Estimate From 2.3% To 1.2%

ZH: Americans Panic Search "Give Car Back" As Subprime Auto Loan Delinquency Erupts (thought this one was worth passing along as it would seem to indicate economy getting incrementally less good … while OFFICIAL data holds up — lets see ‘bout that NFP Friday — it will be interesting to see if any / all this ‘holding up’ is due to 2024 election cycle … time may very well tell IF we go from forgiving student loans TO subprime auto borrowers … nah, prolly not, right? for more refer to story noted in ZH from BBG BBG on how, ‘car owners falling behind on payments AT HIGHEST RATE … EVER’ …)

…Recent data from Edmunds reveals that an unprecedented 17% of American car purchasers now have monthly car payments of $1,000, a significant increase from just 7% three years ago. This trend highlights the extent to which consumers, despite being financially stretched, are willing to take on massive auto debt in these uncertain economic times as macroeconomic headwinds pile up.

New Google data, first revealed by X user CarDealershipGuy, shows Americans are searching "give car back" on the internet has soared to a record high. 

CarDealershipGuy added, "For everyone DMing me: No, you can't "give back" a car - That's a repossession."

AND from Hedgeye … an oldy but a goody

AND … THAT is all for now. Off to the day job…