Treasuries and Stocks Spinning on Rebound-Minded Axis

The major indices had a bad day yesterday, continuing what has been a bad — actually, very bad — month for them. The Russell 2000 is down 7.3%, the Nasdaq Composite is down 6.9%, the S&P Midcap 400 is down 6.6%, the S&P 500 is down 5.2%, and the Dow Jones Industrial Average is down 3.2% in September.

It shouldn’t be any stretch of the imagination, then, to deduce why the equity futures market is pointing to a higher open. It is as simple as believing the market is due for a bounce from a short-term oversold condition that saw the S&P 500 fall below 4,300 yesterday for the first time since early June.

Currently, the S&P 500 futures are up 17 points and are trading 0.4% above fair value, the Nasdaq 100 futures are up 54 points and are trading 0.5% above fair value, and the Dow Jones Industrial Average futures are up 116 points and are trading 0.4% above fair value.

The upside action has been helped along this morning by a dip in market rates, which is fitting knowing that their rapid rise this month has been the primary catalyst for the stock market’s somewhat rapid descent this month.

The 2-yr note yield, which is up 23 basis points in September, is down seven basis points this morning to 5.07%, and the 10-yr note yield, which is up 41 basis points this month, is down five basis points this morning to 4.50%.

The improvement in Treasury yields can be spun on the same rebound-minded axis. Treasuries have also been oversold on a short-term basis, which is leaving many participants to think that they are due for a bounce, too.

Notably, they have not looked overly concerned this morning to Minneapolis Fed President Kashkari (FOMC voter) telling CNBC that he is not sure if the Fed has a sufficiently restrictive policy rate yet and that his dot in the Summary of Economic Projections envisions one more rate hike in 2023 and the Fed holding steady in 2024 (i.e., no rate cuts next year). They were also not overly bothered by reports of a pickup in business spending in the August Durable Goods Orders Report.

Total durable goods orders increased 0.2% month-over-month in August (Briefing.com consensus -0.2%) following a downwardly revised 5.6% decline (from -5.2%) in July. Excluding transportation, durable goods orders were up 0.4% (Briefing.com consensus 0.3%) following a downwardly revised 0.1% increase (from 0.5%) in July.

The key takeaway from the report is that orders for nondefense capital goods excluding aircraft — a proxy for business spending — were up a robust 0.9% month-over-month, rebounding from a 0.4% decline in July.

We wouldn’t call the bid in the equity futures market “robust,” but the bid is there and it will translate into a higher open for a beleaguered stock market that will be drafting off expected gains in the mega-cap stocks.

Something else that is flying beneath the radar for now it seems is the pickup in oil prices. WTI crude futures are up 2.2% to $92.37/bbl. Rising oil prices, which are up 10.4% this month, have contributed to the rise in market rates, so it will be interesting to see if the Treasury market turns its focus back to the oil price move.

For now, the Treasury market and the stock market are locked in on a rebound try from oversold conditions.

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Originally Posted Septembe 27, 2023 – Treasuries and stocks spinning on rebound-minded axis