Looking Better and Feeling Better as Rates Drop

Things look better today and they feel better. That’s largely because there has been a notable pullback in market rates from yesterday’s highs as the Treasury market took solace in the understanding that the October ISM Manufacturing Index was weaker than expected and in the notion, borne out of Fed Chair Powell’s remarks at his press conference, that the Fed could possibly be done raising rates.

Fed Chair Powell, of course, would be quick to remind anyone that the Fed will raise rates again if the data warrant another rate hike. It is the market, however, that thinks that is empty lip service that won’t ultimately translate into an actual rate-hike action.

Accordingly, the 2-yr note yield has dropped to 4.94% from yesterday’s high of 5.08% and the 10-yr note yield has fallen to 4.63% from yesterday’s high of 4.91%, aided presumably by some short-covering activity. 

That drop in rates has catalyzed some missing buy-the-dip interest that is boosting many stocks, because most stocks have certainly “dipped” over the last three months. Collectively, the losses pulled the S&P 500 and Nasdaq Composite into correction territory (i.e., down 10%+ from a prior closing high), so the timing of this drop in rates is ideal. The S&P 500 stands ready to clear resistance at its 200-day moving average (4,244) at today’s open.

Currently, the S&P 500 futures are up 41 points and are trading 0.9% above fair value, the Nasdaq 100 futures are up 203 points and are trading 1.4% above fair value, and the Dow Jones Industrial Average futures are up 232 points and are trading 0.7% above fair value.

The market was oversold and speculation was rising that it was due for a bounce from its oversold condition and, lo and behold, that is what is taking place against a large body of earnings results since yesterday’s close that have been greeted more generally with a positive response. Investors will be hoping that Apple (AAPL) gets the same treatment when it reports after today’s close.

The bounce is happening today, too, in the wake of some generally pleasing economic data.

Nonfarm business sector labor productivity increased 4.7% in the third quarter (Briefing.com consensus 3.6%) following an upwardly revised 3.6% increase (from 3.5%) in the second quarter. Unit labor costs decreased 0.8% (Briefing.com consensus) following an upwardly revised 3.2% increase (from 2.2%) in the second quarter. That was the highest rate of productivity since the third quarter of 2020.

The key takeaway from the report, other than the impressive uptick in productivity, is the decline in unit labor costs. It is a particularly timely piece of data, as it plays perfectly into the market’s swelling expectation that moderating inflation pressures will keep the Fed from raising rates again.

Separately, initial jobless claims for the week ending October 28 increased by 5,000 to 217,000 (Briefing.com consensus 214,000). Continuing jobless claims for the week ending October 21 increased by 35,000 to 1.818 million.

The key takeaway from the report is much the same, which is to say the low level of initial claims isn’t consistent with a material weakening in the labor market.

In other news, the Bank of England followed suit with the FOMC and voted to maintain the Bank Rate at 5.25%. This vote, however, wasn’t unanimous. It was 6-3 in favor of no change. Three members wanted a 25 basis points rate hike. It is the Bank of England’s expectation that “Monetary policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term.”

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Originally Posted November 2, 2023 – Looking better and feeling better as rates drop