The Weekend Edition # 108

Welcome to another issue of the Weekend Edition.

Thank you to all who’ve read and welcome to all the new subscribers this week!

Here’s what we cover:

• Market Recap - Choppiness continues

• Macro - What’s up with Bonds?

• Earnings Season Q3 - Banks are having a ball

• The Week Ahead - Economic & Earnings Calendars

• Closing Thoughts - Further Chop?!

Let’s dive in ⬇️

Market Recap - Oct 09 - Oct 13, 2023

Just as we expected, this was a choppy week because of all the macro data releases and the start of earnings season. We saw both PPI and CPI come in hotter than expected. While the PPI was shrugged off by the markets, the Headline CPI coming in higher didn't go unnoticed. To add to that, war escalating in the Middle East put markets into a further into risk-off mode.

We had a solid set of earnings come out of the banks on Friday, which did attempt to push the market higher but, not for long. Not even options Friday, could keep the markets from closing lower.

Next week, we have Tesla earnings and a few more that are big enough to move markets.

Commodities

As expected, oil saw a spike on Monday and then a pull back before another spike on Friday with the news of conflict escalation. Agricultural commodities also got a bid on this news, as did precious metals. Base metals however, got beaten down because of news coming out of China. Chinese inflation numbers took a dive again, coming in at 0% leading to negative sentiment about activity there.

Some of the charts in the recap section have been sponsored by Koyfin. We have a special discount of 15% for MacroVisor readers for any new sign-ups to Koyfin. To take advantage of this promo please sign up here - Koyfin MacroVisor Discount

Macro - What’s up with Bonds?

I posted this chart on Twitter earlier today. The P/E Ratio for the S&P 500 has been heavily skewed upwards by the mega-cap tech. Excluding the 7 mega cap companies, the P/E ratio is at 16x, below the 10-year average. This should have ideally caused breadth to widen with more people piling into the rest of the market because it's relatively undervalued, historically speaking.

While we've waited to see the market broaden out, we've only seen far more selling in the past two weeks. With the end of the year coming, we're likely to see some more pressure from funds taking profits, particularly in the larger stocks. So instead of the 493 stocks rise higher, we're likely to see the profit-taking in the 7 tech stocks to bring down the P/E ratio further.

Most market analysts see the market poised for a rally from here however, based on the fact that we may have reached peak rates. With bond yields touching 5%, and USD 5.7T sitting in Money Market Funds, it stands to reason that some of that will flow into the new Treasury Issuances. BoFA seems to think this is the source of the next bull market in bonds and they may not be completely wrong.

While most of the money has been flowing into shorter-dated bills thus far, the prospect of peak yields and possible rate cuts in 2024 means, many of these MMFs have started to move into duration. We're still not seeing demand for the 10Y+, as the recent auctions showed. This isn't surprising, given the inversion of the Yield Curve which means the shorter end rates are paying more. And now, the 3-month actually pays more than the overnight repo rate, which is not a bad trade-off for the MMFs. According to JPM, the average duration for MMFs have now increased from 10 days in April 2023 to 30 days in September.

The chart above shows the Repo Rate in blue, the 10Y government treasury note yield in orange and the 3-month government treasury bill in purple. As you can see, we are now in a situation where the 3 month yield is higher than the repo rate, while the 10Y yield remains below. The positive spread that MMFs are earnings on the 3 month T-bill is enough to entice them to move to these longer maturities.

Finally, we also have the treasury issuances. There has been $1.36T in T-bill issuances since May 2023. While much of the treasury issuances have remained at the short end up until now, the forecast is for the treasury to start issuing more and more further along the curve, pushing prices lower and rates higher. This is one reason that we continue to think that we will see a bear steepener - the long end rising faster than the shorter end.

Earnings Season - Banks are having a ball

FactSet Earnings Recap:

The bank earnings turned out to be quite as we'd discussed in our earnings previews. All the major banks and Blackrock delivered double beats. Some of the more interesting observations from earnings this week:

• Blackrock's operating income growth has turned positive. While Assets under Management declined marginally during the quarter, the average AUM improved substantially from 2022 levels.

• JP Morgan discussed capital requirements with quite a lot of intensity. If their forecasts are correct, they will need to increase their capital levels by 45% compared to 2017 levels, since the last change in rules.

• JP Morgan also discussed consumer spending declining or normalizing to pre-pandemic levels.

• As expected, provisions have declined but, net charge-offs or defaults have gone up.

• Investment banking revenues were up again, after a very subdued 2022.

• And finally, JP Morgan also admitted to over-earnings over the last few quarters because of the rise interest rates - so they managed to adjust interest rates to charge more on loans but, interest cost paid on deposits hadn't quite caught up. That's about to change.

We have a full week next week, with a continuation of banks. But we also pharmaceuticals, truckers, rails, miners, semi-conductors, and the card companies. As always, we will cover these in our weekly earnings previews.

The Week Ahead - Calendars

US Earnings Calendar

US Economic Calendar in Eastern Time (Source: Trading Economics)

Closing Thoughts - Further Chop?!

Over the course of last two weeks, we saw the sell-off in bonds take a breather - mostly for three main reasons:

• After what we discussed in the macro section above, it's not surprising that with prices being that low on bonds, there was money flowing into the bonds.

• There were also unwinding of shorts as some of the bear steepener trades got stretched

• There was flight to safety with war declared in the Middle East

Fed Speakers also had a part to play in this. There was so much chatter about how the higher bond yields were effectively doing their job for them by tightening financial conditions. The irony here though, is that all of that dovish talk about not needing to tighten unwound some of those tight conditions and the markets brief rally started to see financial conditions loosen again.

We're in a precarious situation now and the market is being driven by global macro factors instead of just bond yields. With earnings season getting back into full flow, I imagine volatility will continue and we're going to see further choppiness this week before the market can firmly pick a side.

Here’s wishing you safe investing.

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers.

None of the above is Investment Advice. I may or may not have positions in any of the stocks or asset classes mentioned. I have no affiliation with any of the companies other than explicitly mentioned.