Who Wants to Buy The Debt?

Summary – IBKR Podcasts Ep. 114

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson

Welcome to this week’s Economic Podcast for Interactive Brokers. Joining me, Andrew Wilkinson to discuss US economics. This week we have Steve Sosnick, Interactive Brokers chief strategist…

Steve Sosnick

Hello

Andrew Wilkinson

… senior economist Jose Torres…

Jose Torres

Hello

Andrew Wilkinson

 …and head of global fixed income trading, Joe Burke.

Joe Burke

Hello

Andrew Wilkinson

Welcome, gentlemen.

Now, markets got a reassuring message to begin November.  Employment gains in October appeared to cool, while the September data was revised down somewhat, and the national rate of unemployment rose to 3.9%. And I think that one of the most important observations over the last two weeks is that the bond market has done much of the Fed’s work for it and yields cooling down substantially. Jose let’s start with you.  What aspects of the labor market do you think are slowing, if at all?

Jose Torres

Well, definitely we got another downward bias on revisions and most of the job growth last month came from non-cyclical areas once again: education, health, and Government.   Five out of 14 sectors lost jobs, wage gains slowed to the slowest pace of the year, the labor force declined, which also contributed to an increase in the unemployment rate. I think going forward, soft stable data is going to be key. We don’t want data that’s too hot, that’s gonna put the Fed back on the markets radar, and we also don’t want data that’s too cold. That can lead to adverse scenarios regarding company revenues and earnings.

Andrew Wilkinson

Do you think that the deceleration points to a soft landing or a recession> I’m going to turn that over to Joe in a moment as well. What’s your thought?

Jose Torres

I think that the path to a soft landing widened out. But again, the risks when we’re going into late cycle monetary policy tightening are still remain elevated because again, if economic activity starts to decline more sharply in the beginning of next year, then we have another problem on our hands and we won’t be worrying much about rates that are too high, we’ll be worrying more about economic activity being too sluggish.

Andrew Wilkinson

OK. Joe, can you pick up on that one: recession or soft landing?

Joe Burke

Well, you know I I think that the the Fed very much has the idea of do no harm on their on their minds in terms of policy. With that said, you know there’s a lot of ancillary data that suggests that perhaps it’s worse than they think it is. For example, credit card delinquencies, auto auto loan delinquencies are as high, higher than they were prior to the the credit crisis in 2007, 2008. So we just don’t know, but there’s a lot of data out there that would suggest that it, it could be pretty ugly.

Andrew Wilkinson

Now let’s let’s stick with you, Joe. Politics seems to be creeping increasingly into the narrative for the bond market. How do you see the landscape there?

Joe Burke

Yeah, I I think I think it’s more political dysfunction than than politics. And you know, the United States has been able to borrow an enormous amount of money at very low rates because there was an assumption that they would ultimately always do the right thing.  But the country is so divided at this point, and you know, we had a political assassination of Speaker of the House.   We have we have a very divided country and Congress. And, you know, they may not do what’s in the best interest of the country and that my opinion is that that is part of the reason why the longer-term rates have gone higher.  Not because of strength in the economy, but because we’re just not we’re not able to function like a normal democracy, and we’re not going to necessarily make good policy decisions.

Andrew Wilkinson

Steve, let’s turn to you.  Talk about the stock market.  Is Apple still a growth stock? Do you think?

Steve Sosnick

I’m gonna say that the the jury is out on that one. I think Apple is really a value stock priced like a growth stock which puts it in a very interesting situation. Apple just reported its fourth consecutive quarter of declining year over year revenues. By any standard, that is actually not growth. Now, Apple is a phenomenal value stock. I don’t know how many people in this room besides myself basically cut a monthly check to Apple for their iCloud use and everything else….

Andrew Wilkinson

…I do…

Steve Sosnick

Yeah, pretty much like I do to the to the electric company or something like that. But the problem is Apple is not priced, like a utility.   It’s not a utility. They’re product-oriented company. But you know, with the 27 P/E and pretty much no growth predicted, at least for the next 12 months in either earnings or revenues — you know I’m I’m oversimplifying a bit — that’s a pretty expensive stock. So you’re paying a huge premium for the stability of cash flow for the stability of earnings. Another interesting thing is they have, I think $160 billion of cash on their books, which right now is earning, call it 5%, which two years ago was earning or even a year ago was earning essentially nothing. So that’s put in a big kick to the bottom line too.  If we’re if we’re talking about a a rate cutting cycle, that profitability also starts to decline. It’s a great company. I just don’t know that it’s priced appropriately for what we’re seeing.

Andrew Wilkinson

Let me ask you, Jose, what’s the next data point on investors’ minds, that’s going to prove whether or not that the Fed’s got things somewhat under control?

Jose Torres

Well, we have a quiet week this week. We just have some Fed speakers, Powell speaking on Wednesday and on Thursday. But I think the big data point is gonna come next week on CPI, Consumer Price. Index. I’m anticipating that that report is only going to show a 0.1% increase in total headline consumer prices, and driving that is, was that in last month we saw significant decline in oil prices from September to October. Goods prices are also softening, and services are softening as well, and given that it’s a strong seasonal period, I’m expecting the market to give a big thumbs up to that CPI report next week.

Joe Burke

Yeah. I’d like to just add to that in terms of economic data, there’s not a lot going on, but the quarterly refunding is this week. So those auctions will be very interesting to watch and we’ll see how receptive the public is to to taking on this debt.

Steve Sosnick

What’s your gut? I mean, cause we, you know, we saw this huge decline in 10-year rates and now we’re going to have a 10-year auction. You know we’re taping this Monday around just before noon and we’ve started to see the 10-year, the 10-year yield tick up you know 6-7 basis points off the lows of last week. Do you have a sense of how this might be? You know how the street might respond to to all the supply coming down?

Joe Burke

Yeah, I think the three-year note will be well received. I think that 10s and 30s could have some struggles. You know we there was a recent auction that did not go well, and I was a seven-year if I’m not mistaken and and you know we could see that happen again with the 10s and 30s. It’s it’s sort of anyone’s guess at this point.

Steve Sosnick

My point being that you know, I think there’s this sense that we’ve really recovered dramatically you know in both stocks and bonds. But this is a risk factor, especially when I look at VIX, you know, having gone 20 to 15.  

Joe Burke

Right.

Steve Sosnick

I think the market the stock market might be underpricing the risk that the bond market sees.

Joe Burke

Yeah, yeah. And and I think, you know, except for the the natural bond buyers who have duration bogeys and they have to be invested at certain durations. I mean, who? Who wants to buy that debt at this? At this point, I mean, you’re you’re going to want a higher premium, I would think.

Andrew Wilkinson

I guess the closing message, there Steve, is watch this space.

Steve Sosnick

Watch this space. This is one of my theses here is that that has been it’s very hard to expect stability in risk assets when you have instability in in low-risk assets. And so when you have the, the two-year note move 15 basis points in one day as it did on Friday, that’s inherently destabilizing because everything is based off the risk-free rate, and we’ve re-rated the likelihood of the the likely path of the risk-free rate.

We went from saying maybe there was one-third chance of a rate hike by sometime before Jan, you know, by the January meeting that’s been priced out by 5 or 10% when I last checked this morning. And we’re also now seeing call it a 25 basis point lower terminal rate at the end of 2024. So that needs to be repriced and and the more you know the stock market liked the good side of that. But I think by sort of saying oh, there’s no more you know that’s it. Let’s take out the volatility and also by the way, there’s a huge influx of money being of ETF’s that now involves some sort of systematic volatility selling, which, as someone who has sold volatility professionally for most of his career, that works really well until one day it doesn’t.  And I don’t know when that is. But you know, if everybody gets on that side of the trade, it increases the risks.

Andrew Wilkinson

Brilliant.  Joe, Steve, Jose, thank you very much for joining me. And to the audience, don’t forget check out more podcasts at ibkrpodcasts.com. And please don’t forget to leave us a rating.