Mid-Week Update
October, as in the previous two months, started with a “bang”. Escalating geopolitical tension between Iran and Israel added fuel to an already ignited bond rally. I found Powell’s slightly hawkish remarks at month-end slightly surprising as he seemed to roll back some of the market’s expectations that the hurdle for a follow-up 50 bps cut in November is very low. Thinking it through only leaves me with the conclusion that he had to bring the messaging closer to what likely transpired on September 18th, when the FOMC “collectively” cut 50 bps. I think that Jay brokered that deal, giving concessions to his committee members to secure his visionary first rate cut of this cycle. This caused an unwind of a very crowded yield curve steepening trades and causing them to reverse sharply over the past few days. Today, the German 10-year yield also broke to new lows (more on this further below), which also ushers a potential for rates to rally further from here, led by Germany and the ECB’s dovish turn, with October now pretty much priced in for a further cut.
On the Eco side, the new month started with JOLTS job openings coming in firmer than expected, pushing above 8 million, though hiring and quitting rates both ticked lower. ISM manufacturing was a bit weaker than expected at 47.2 in September, unchanged from August. New orders saw some sequential improvement but were still in contraction, while prices paid and employment deteriorated. The numbers were not great, but not a game changer, and they were quickly put to the backburner given the escalation in the middle east. There are many moving markets, and we caught some of the exhaustions highlighted in ATW really well. Before we get to the charts, let’s hear Macro D’s latest thoughts.
Let’s dig in.