Attack the Week (ATW)
October 30, 2023
I went to see ABBA Voyage last Friday. I am not a massive fan, and I was, as usual, very sceptical about what a virtual concert can bring. I was totally blown away by the experience. This is the future right there. As the lights dimmed and the stage came alive, fans (and I) revelled in the euphoria of seeing the iconic band perform again. But it wasn't just the music that captured our attention; it was the fascinating intersection of technology and artistry that challenged our traditional notions of reality.
Using advanced holographic technology, the members of ABBA appeared in their prime, evoking nostalgia and pushing boundaries. The blending of the real and virtual challenged audiences to differentiate between what was tangible and what was meticulously crafted illusion. And this is just the start. Imagine what will be possible in a few decades from now. Quick Elvis concert at home with friends? Sure thing. The applications go way beyond music. I rarely get wowed, but I sure did on Friday night.
Financial markets, much like the show, are driven by perceptions of reality. We all act on our beliefs, which may be grounded in objective data or influenced by collective sentiment. Just as concert-goers might momentarily forget the line between the real ABBA members and their holographic doppelgängers, investors can be swayed by market euphoria or panic, blurring the lines between a stock's intrinsic value and its speculative price.
The success of a virtual concert, in part, is attributed to the audience's willingness to suspend disbelief. Fans embraced the experience, fully aware of the digital artifice because they wanted to be part of the magic. Similarly, in financial markets, belief systems play a pivotal role. Whether it's the "hot stock tip" from a friend or the allure of a trending cryptocurrency, the collective faith of participants can drive market trends, regardless of underlying fundamentals.
Merely a few years ago, the financial belief system announced secular stagnation and used demographics as the primary argument to justify forever low rates. Now that we have touched 5% for the first time in more than 15 years, similar belief systems are being normalised again, only to portray a future of higher rates forever. Which one is real, and which one is fake? Maybe they are both real, but time and constellations have changed in such a manner that both arguments can be given consideration.
We saw a very strong 4.9% increase in Q3 GDP growth last week. Atlanta Fed GDPNow’s early estimates a few months ago of exceptionally strong Q3 growth proved largely correct, with their preliminary estimate for Q4 at 2.3%.
As expected, consumption was the primary growth driver, with a 4.0% increase, rebounding from a softer 0.8% in Q2. Spending has also broadened away from just spending on services, with both goods and services consumption increasing in Q3.
It is unlikely that such strong consumption will be repeated in Q4 – the restart of student loan payments, some increase in consumer delinquencies, and seasonal adjustment issues around holiday season spending.
The hotly anticipated Treasury Refunding Announcement should not flare up any surprises this week, as issuance fear has most likely peaked for now. The Treasury doesn’t have much choice other than to increase coupon issuance substantially, but shifting more supply into T-bills is not a viable alternative, as it would result in higher TGA and rollover risks. I do believe that supply guidance is likely already priced into the curve, and we could see a relief rally after the announcement.
The FOMC meeting, which is on the same day as the refunding announcement, should be less relevant for once. The Fed has no new information to share, with a widely signalled pause. July may well have been the last rate hike in this cycle. Interestingly, the sell-off in the 10y since the July FOMC meeting has deviated glaringly from prior trends of rallies in the 10y post the last hike. It is possible that the rally this time happens when there is greater clarity that the Fed is done, i.e. once we get past the December meeting or close to it. Softer data is, however, needed to build a more sustained base for bonds to rally.
Let’s now explore what else is going on this week and what charts you should consider in addition to what I have already posted in Friday’s Paper Charts.