10/20/23 – US Deficit spending causes indigestion in the Bond Market
The retail sales measure for September that was released on Tuesday influenced trading for the entire week. The expectation was that sales would rise 0.3% over the August tally. The actual result was a 0.7% month-over-month gain, with the August measure revised to 0.8% from 0.6%. The three-month period has been a blockbuster for retailers. The irony is that the narrative has changed since Amazon had their supersale in July. The sales event exceeded expectations, leading to forecasts that it cannibalized sales that would have occurred in August and September. That explanation has been recast that the Amazon sale actually reenergized consumers on-line shopping. Our take on it is that despite the sharp rise in interest rates over the last 18 months, the economy has yet to cool significantly.
That realization was the driver behind the abysmal performance of stocks and bonds this week. The two-year note is nearly unchanged for the week, closing at 5.05%, but the real fireworks came at the long end of the curve. The long bond sold off sharply rising from 4.75% to close the week at 5.07%, completely dis-inverting the yield curve. The shape of the yield curve is meaningful to economists and bond traders alike. The yield curve will, under normal circumstances, have a positive upward slope to compensate a bond holder for the risk posed by longer maturities. The inversion experienced over the last year has been an expectation that the Fed would be able to achieve their mission to defeat inflation, then reverse the rate hikes quickly. The current shape reflects the “higher for longer” story that the Fed has articulated. That realization spooked the stock market with the S&P500 dropping nearly 2% for the week.
Next week brings the meat of the corporate earnings season as well as an active economic release calendar, and therefore plenty of news to move the markets. Of particular interest to us is the third quarter GDP. It’s expected to come in at 4.3% annualized growth, which like the recent string of retail sales gains is remarkable in light of the hawkishness of the Federal Reserve.
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