It would appear that the stock market has the Treasury market on its side for the time being. The 10-yr note yield is down three basis points to 4.85% after hitting 4.80% earlier in what might rightfully be called a relief trade.
The relief has come in two parts. The first part relates to the Treasury’s downwardly revised Q4 borrowing estimate of $776 billion (prior $852 billion). That was announced yesterday, but we would argue that there is some carryover exhale today. Still, the market isn’t breathing entirely easy knowing that the refunding announcement, which will lay out the size of auctions for various maturities, will be made Wednesday ahead of the FOMC decision.
The second part, which is the main driver this morning, is that the Bank of Japan (BOJ) took a less hawkish-than-feared approach in tweaking its yield curve control policy. The tweak is that the upper bound of 1.0% for 10-yr JGB yields will be viewed now as a “reference point” rather than a strict cap. There was some conjecture, though, that the upper bound could be set as high as 1.5%.
In any case, with the BOJ keeping its short-term policy rate at -0.1% and not loosening control of the yield curve more fully, it has tempered concerns about a more aggressive unwinding of carry trades that have been supportive for the Treasury market and the stock market.
Notably, the yen is down big against the dollar today. USD/JPY sits at 150.93, up 1.2% and pressing a 33-year high. That weakening is going to stir talk of intervention by Japan’s Ministry of Finance that could result in some selling of Treasuries. For now, though, all that talk is still hot air based on the yen’s standing.
There has been some air in the equity future market this morning, yet it has also been deflating on the approach to today’s open. Currently, the S&P 500 futures are up six points and are trading 0.1% above fair value, the Nasdaq 100 futures are up five points and are trading fractionally above fair value, and the Dow Jones Industrial Average futures are up 16 points and are trading fractionally above fair value.
Dow component Caterpillar (CAT) has taken some of the air out of the market. The industrial giant topped third quarter consensus revenue and EPS estimates, but its guidance that Q4 sales are expected to be slightly higher than year-ago period has been deemed disappointing. Shares of CAT are down 4.8% in pre-market trading.
Fellow Dow component Amgen (AMGN) is also trading lower, down 1.0% after topping Q3 earnings estimates and providing in-line FY23 EPS guidance.
These companies have headlined another rush of earnings reporting this morning that has been met with mixed reactions.
In economic news, the Q3 Employment Cost Index showed compensation costs for civilian workers increasing 1.1% (Briefing.com consensus 1.0%), seasonally adjusted, versus a 1.0% increase for the three-month period ending in June. Wages and salaries were up 1.2% and benefit costs increased 0.9% from June 2023.
The key takeaway from the report is that compensation costs decelerated to 4.3% for the 12-month period ending in September versus 5.0% in September 2022. Still, that’s not enough of a change to convince the Fed that it can think about cutting rates anytime soon.
The Treasury market saw some selling interest in the wake of the data, which precedes the August FHFA Housing Price Index and August S&P Case-Shiller Home Price Index at 9:00 a.m. ET, the October Chicago PMI at 9:45 a.m. ET, and the October Consumer Confidence Index at 10:00 a.m. ET.
Other economic headlines today include reports that China’s manufacturing PMI fell back into contraction territory in October and that the eurozone’s flash CPI reading for October showed a deceleration in the rate to 2.9% from 4.3%.
That is some mixed economic news that fits the current tone of the equity futures trade coming off a nice rebound-minded session on Monday.
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Originally Posted October 31, 2023 – Air flows in and out of market
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