Equities rebounded after the Fed’s dovish commentary. Treasury yields dropped, the positive earning results and seasonality also supported better equity performance. Macro data started to show signs of slowing as both job reports and ISM reports were surprised to the downside.
Economic Data: The Federal Open Market Committee (FOMC) decided to keep rates unchanged this week. Nonfarm payroll is weaker than expected (150k actual vs 180k expected) with the unemployment rate jumped to 3.9%.
Issuance Plan: Treasury announced its bond issuance plan this week, including the number of bond issuance and breakdown of maturities in the coming quarter. The boost of refunding is lower than expected ($112b actual vs $114b expected). The increases in issuance of short-dated will remain at the same pace while long-dated will be slower.
YCC: Bank of Japan relaxed the yield curve control (YCC) policy for the second time. The 10Y yield is allowed to rise above 1% and it will not be a strict level anymore. The change in policy is partly driven by the extension of measures to reduce energy costs, which led to an increase in inflation forecast.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Goldman Sachs: Tech stocks rebounded after the dovish Fed’s commentary with weak macro data. Short covering of some of the names also drove outperformance this week.
Morgan Stanley: Investors are suggested to keep an eye on market liquidity if they are betting on a Santa Claus rally, which may be impacted by these factors - dollar strength, widening credit spread, restrained bank lending and elevated energy prices.
Morgan Stanley: Historically, interest rates tend to be the sum of inflation expectations and real economic growth. Given that investors demand a 200bps premium over inflation rates on average, they tend to push 10Y yield higher when the current CPI is 3.7%, especially if the fiscal spending and demand growth are robust.
UBS: The US Treasury announced the decision to slow the increase in long-dated bond issuance to control long-duration yields. It indicated that the Treasury and Fed are willing to address the problems in treasury markets, which aligns with the expectation that 10Y yield will drop to 3.5% by June next year.
J.P. Morgan: Real GDP growth in Q3 is the highest in almost 2 years. However, it could only be a one-off surprise. Consumer spending is the major contributor which is not sustainable as real income growth is slower than real spending, meaning consumers borrow or reduce their savings to fund their spending. The expiring student loans and childcare benefits also put pressure on spending.
UBS: Growth is expected to slow in the coming months as the high interest rates are hurting rate-sensitive sectors like auto and housing sales. Saving rates are expected to increase due to the resumption of student loan payments, the end of childcare subsidies and the trimming Medicaid rolls.
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