Helter-Skelter in Bonds as Markets Doubt Fed Cuts
(…) In the wake of the Federal Reserve’s decision last month to make a jumbo cut of 50 basis points to the fed funds rate, the 10-year yield dropped below 3.6%. It’s now above its 200-day moving average, at 4.19%. The helter-skelter ride continues.
Why the change of direction? Chiefly, there is a reassessment of the Fed’s likely next move. In the wake of the jumbo cut, the fed funds futures priced in further cuts of 100 basis points by January’s meeting. That meant certainty that there would be at least one more big cut. The surprisingly strong employment data for September reined that in drastically. Since then, the expected cuts have continued to whittle away, and now the market thinks that there will most likely be only 50 basis points of cuts over the next three meetings. From pricing a certain jumbo cut, they are now positioning for a likelihood that there will be at least one meeting when the Fed stands pat. (…)
But it’s not just about the Fed. As much discussed, betting markets have shifted strongly toward predicting a victory for Donald Trump. In the last few months, it’s striking that the 10-year yield has traced the Trump odds according to Polymarket — an offshore market that may be over-influenced by a few large bettors, but which seems to be driving opinion on Wall Street. The following chart is on two scales, but still captures the way the bond market has evidently moved in response to the campaign:
Tax cuts, as promised by Trump, would tend to be expansionary and prompt higher rates from the Fed. Also, as former New York Fed President Bill Dudley explains for Bloomberg Opinion, “across-the-board higher tariffs would both raise inflation and hurt growth” — which would entail higher rates. (…)
That said, his victory in 2016, and the tax cuts and tariffs that followed in the next two years, spurred a big rise in bond yields while stocks massively beat Treasuries. It’s no surprise that people are positioning for this again. (…)
There are important differences. The PredictIt prediction market put Trump’s chance of victory at 22% on election eve in 2016; the same market now puts him at 58% (while others rate him higher). So whatever happens in the next two weeks, we can assume that a Trump victory wouldn’t provoke quite so big a reaction, because it wouldn’t be such a big surprise. (…)
With the Atlanta Fed GDP estimate for the third quarter currently at 3.4%, the bottom line is that the expansion continues/
Why is the incoming data so strong? Because the list of tailwinds to the economy keeps growing:
1) A dovish Fed
2) High stock prices, high home prices, and tight credit spreads
3) Public and private financing markets are wide open
4) Continued support to growth from the CHIPS Act, the IRA, the Infrastructure Act, and defense spending
5) Low debt-servicing costs for consumers with locked-in low interest rates
6) Low debt-servicing costs for firms with locked-in low interest rates
7) Geopolitical risks easing
8) US election uncertainty will soon be behind us
9) Continued strong spending on AI, data centers, and energy transition
10) Signs of a rebound in construction order books after the September Fed cut
These 10 tailwinds are increasing the likelihood that the Fed will have to reverse course at its November meeting.
In short, the no landing continues.
Housing remains weak:
New Car Sales Fall in Europe On Weakened Demand September saw a 6.1% on-year drop in the bloc’s registrations, reflecting sales
EU registrations came to around 809,163 for the month.
Stellantis, the multinational company behind European brands like Peugeot, Citroen and Fiat, posted a 27% drop-off in registrations compared with last year. The Jeep and Ram maker was hampered in the third quarter by excess inventory in the U.S., while delays to new model launches also hurt shipments.
Registrations for Volkswagen, Europe’s largest carmaker, rose 0.3%, ACEA said. German luxury brand BMW rose 7.6%, whereas Mercedes-Benz fell 7%. France’s Renault saw new-car registrations fall 1.5%.
Battery-electric vehicle and hybrid-electric cars registrations rose 9.8% and 12.5%, respectively, the industry group said. Sales of conventional gas-burning cars and plug-in hybrids both declined.
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China EV Exports to European Union Soar Ahead of Incoming Levies EVs shipped to the bloc second highest on record last month
Firms from Asia’s biggest economy shipped 60,517 EVs to the 27 nations in the European trade bloc last month, up 61% from last year, according to customs data. The previous peak of 67,455 vehicles was in October 2023, when the European Commission announced that it was launching an anti-subsidy investigation into China-made EVs. (…)
BYD Co. plans to set up production in Hungary and Turkey, and other manufacturers including Xpeng Inc. and Zhejiang Geely Holding Group Co.’s premium EV brand Zeekr say they’re considering localizing production.
Decade of Big S&P 500 Gains Is Over, Goldman Strategists Say Expect annualized nominal return of 3% over coming 10 years
That compares with 13% in the last decade, and a long-term average of 11%.
They also see a roughly 72% chance that the benchmark index will trail Treasury bonds, and a 33% likelihood they’ll lag inflation through 2034. (…)
Even if the rally were to remain concentrated, the S&P 500 would post below-average returns of about 7%, they said. (…)
Callum Thomas has these interesting charts, arguing that “over the long-run it’s actually more normal for the equal-weighted index to outperform the cap-weighted index. And as of right now the equal/cap weight relative performance line is very stretched to the downside vs trend and has bounced off the 09 low point.”
Source: GS via @MikeZaccardi
3Fourteen Research’s view is going the opposite way:
Our longstanding (and consensus) opinion has been that the S&P 500 was overvalued based on traditional metrics. After months of research and pushing ourselves to see past potential blind spots, we updated those views last week. Our conclusion: The S&P 500 is less overvalued than suggested by traditional metrics.
When you consider quality metrics, margin sustainability and the interaction between margins/multiples across different businesses, today’s S&P 500 appears fairly valued. If analysts are correct about forward earnings, then there is much more upside left in the current bull market.
They provide this video (the valuation discussion starts around the 42 minute mark.): Warren & Fernando on The Compound and Friends
Russia Hosts BRICS Leaders, Signaling Putin Is Far From Isolated Kremlin expects more than 30 countries to attend Kazan summit
Leaders of 32 countries, as well as top officials of regional organizations and United Nations Secretary-General Antonio Guterres, will attend the three-day summit starting Tuesday in Kazan, Kremlin foreign policy aide Yuri Ushakov told reporters.
Chinese President Xi Jinping, Indian Prime Minister Narendra Modi, and South African President Cyril Ramaphosa are due to join Putin alongside leaders of the new BRICS members, Iran, Egypt, the United Arab Emirates and Ethiopia. Putin plans bilateral meetings with many of them, as well as with guests such as Turkish President Recep Tayyip Erdogan.
Brazilian President Luiz Inacio Lula da Silva on Sunday canceled his plans to attend the summit after suffering a head injury in an accident at his home. Officials said he’ll participate by video link. (…)
While BRICS favors greater use of national currencies in bilateral trade, members including India reject attempts to promote China’s yuan as an alternative reserve currency.
Russia has produced a summit report outlining possible changes to cross-border payments among BRICS countries aimed at circumventing the global financial system, though it acknowledges the proposals are mainly to promote discussion. They include developing a network of commercial lenders to conduct transactions in local currencies as well as establishing direct links between central banks. (…)
Russia wants to push for a de-dollarized payment system at the summit, which China regards as too ambitious, said Wang Yiwei, director of Renmin University’s Center for European Studies in Beijing.
The meeting is the first since BRICS agreed to extend membership to six additional nations at last year’s summit in South Africa. But Argentina pulled out under its new President Javier Milei and Saudi Arabia has remained non-committal.
Nations ranging from Malaysia and Thailand to Nicaragua and NATO-member Turkey are eager to join BRICS, though there’s unlikely to be an agreement on enlargement at the Russia summit.
India is against further expansion for now and supports a category of “BRICS partner countries” without voting rights because it wants to steer the group away from becoming an anti-US body dominated by China and Russia, Indian officials said on condition of anonymity because the issue is sensitive.
Brazil and South Africa support India’s view, said officials in the two countries. Any bid to dilute South Africa’s influence by inviting Nigeria or Morocco into BRICS will be resisted, said the South African officials.
The UAE completely rejects any attempt to present BRICS membership as a sign that the Global South is in opposition to the West, according to a person familiar with the matter, asking not to be identified discussing internal policy. The Gulf state has very good relations with countries in the West including the US, according to another official. (…)
BRICS’ clout is growing. Its nine members account for 26% of the world economy and 45% of the world’s population versus the G-7’s 44% of global gross domestic product and 10% of its inhabitants. (…)
The fact so many countries want to join BRICS indicates growing demand for international ties independent of the West, said Fyodor Lukyanov, head of the Council on Foreign and Defense Policy, a think tank that advises the Kremlin.
“For now, everyone just wants to see what it can gain from this,” he said.
Crises at Boeing and Intel Are a National Emergency The two companies once set the standard for world class engineering and manufacturing. Their troubles weaken America.
(…) The U.S. is in a geopolitical contest with China defined not just by military power but economic and technological prowess. Leaders from both U.S. political parties say they are on the case, pushing for tariffs and subsidies. (…)
The U.S. still designs the world’s most innovative products, but is losing the knack for making them.
At the end of 1999, four of the 10 most valuable U.S. companies were manufacturers. Today, none are. The lone rising star: Tesla, which ranked 11th. (…)
Neither fell prey to cheap foreign competition, but to their own mistakes. Their culture evolved to prioritize financial performance over engineering excellence, which also brought down another manufacturing icon, General Electric. (…)
Since their problems are of their own making, it is tempting to leave them to their fates. Investors would likely shrug: Intel is worth less than $100 billion while Microsoft, Apple, and Nvidia are together worth $10 trillion.
The problem: Those tech giants’ software and devices are useless without the advanced semiconductors whose fabrication they contract out, especially to Taiwan Semiconductor Manufacturing Co. If China makes good on its threat to subjugate Taiwan in the coming years, the entire U.S. tech sector could be at Beijing’s mercy. (…)
Intel is the only U.S.-based company capable of competing with TSMC, and it is struggling to do so.
While Elon Musk’s SpaceX has outclassed Boeing when it comes to space transport, there are no homegrown alternative suppliers of large commercial airliners. Without Boeing, that business would go to Airbus and, eventually, China’s state-owned Comac, which is now delivering its own competitor to the 737 and Airbus’ A320, the C919.
The loss of either company would have industrywide repercussions. Each supports a multilayered ecosystem of designers, workers, managers and suppliers. Once that ecosystem moves offshore, it is almost impossible to bring back. (…)
National security dictates the U.S. maintain some know-how in making aircraft and semiconductors.
Certainly other countries feel that way: European governments heavily subsidized Airbus. China is pursuing dominance in key technologies regardless of the cost. Its so-called Big Fund has sunk roughly $100 billion into semiconductors while aid to Comac had reached $72 billion in 2020, according to the Center for Strategic and International Studies. (…)
The goal of manufacturing strategy shouldn’t be just producing jobs but great, world-beating products. Washington can help by encouraging the world’s best manufacturers to put down roots in the U.S. That forces American companies to raise their game and nurtures the workforce and supplier network that serves all companies. The Chips Act, by encouraging TSMC and Samsung to build or expand fabs in the U.S., indirectly helps U.S.-based Intel, GlobalFoundries and Micron (all of which have received subsidies). (…)
Labor has a role here, too. Boeing’s union, whose leaders reached a new, enriched deal this past weekend, blamed the company’s woes on management—as did the auto workers who struck Detroit last year. But they are all in this together. Workers should weigh not just what Boeing pays in the next few years, but whether it will be around a generation from now.