Five In The Wallet: 10-Year Yield Flirts With 5% For First Time Since 2007 As Fed's Powell Speech Awaited

(Thursday market open) U.S. 10-year Treasury note yields flirted with 5% this morning for the first time since 2007 as Federal Reserve Chairman Jerome Powell prepared to discuss the economic outlook. Major indexes vacillated from red to green overnight, still digesting mixed earnings news from Tesla TSLA and Netflix NFLX.

Powell’s noon ET speech at the Economic Club of New York may not delve deeply into rate policy ahead of the next Fed meeting but it could provide a sense of how Powell views the robust economic data released since the Fed’s last gathering a month ago. Jobs, inflation, and retail sales all came in hotter than expected, strengthening expectations that rates could stay higher for longer.

Another question is whether Powell, like other recent Fed speakers, will address the upward spiral in Treasury yields. Some Fed policymakers have suggested that high yields themselves could limit the need for future rate hikes.

Wall Street’s resilience despite 16-year highs in Treasury yields was tested Wednesday for the third day in a row, and this time it couldn’t meet the challenge. Cyclical sectors like materials, industrials, and consumer discretionary—which often do well in good economic times—formed the bottom of the leader board, outperformed by defensive sectors like staples, utilities, and health care. The broader market hit two-week lows.

Weaker-than-expected quarterly results from some airlines and shipping companies weighed on the transport sector. Also, the KBW Regional Banking Index (KRX) dropped nearly 3% Wednesday.

Morning rush

• The 10-year Treasury note yield (TNX) rose another 7 basis points to 4.98%.
• The U.S. Dollar Index ($DXY) is stable at 106.44.
• Cboe Volatility Index® (VIX) futures are up sharply this week, now at 19.72.
• WTI Crude Oil (/CL) pulled back to $86.66 per barrel.

As a reminder, the recent spike in benchmark 10-year Treasury note yields to 16-year highs reflects multiple factors: increased supply from the U.S. Treasury; recent hawkish Fed comments and projections; mounting worries that inflation and high interest rates could last well into 2024; and the Fed’s quantitative tightening (QT) policy.

This week, the futures market began extracting nearly any chance of a November rate hike. This could be partly due to geopolitical issues like the war in Israel and the assumption that the Fed wouldn’t want to add to the market’s tension. However, chances of a December hike have climbed above 40%.

Just in

Initial Weekly Jobless Claims reached a new nine-month low at 198,000, below 200,000 for the first time since January. There wasn’t much immediate market reaction, but surprising job market resilience is another factor driving up yields.

What to watch

Existing Home Sales for September and Leading Economic Indicators from The Conference Board later this morning round up data for the week.

The Leading Economic Index fell in August, marking the 17th consecutive monthly decline for this metric that’s often seen as a warning signal for recession. No relief is on the way today if analysts are correct. Consensus is for a 0.4% September decline, the same as in August, when the index was down 3.9% for the prior six months. Weak new orders and tight credit conditions hindered the index in August, so check for any sign of change there when the new report comes out at 10 a.m. ET.

Existing Home Sales also bow at 10 a.m. ET—and stuck in a similar rut. September is expected to show the headline at a seasonally adjusted annual rate of 3.9 million, down from 4.04 million in August, according to Briefing.com. Inventory remains scant while prices keep rising despite climbing mortgage rates. Speaking of mortgages, applications for those fell last week to their lowest level since 1995 as more people stay put with the 30-year rate up to around 8%.

Stocks in spotlight

Tesla TSLA shares initially maneuvered their way to slight premarket gains despite the company missing both top- and bottom-line earnings expectations from Wall Street. Investors seemed relieved that gross margin didn’t get dented too badly despite the company’s recent price cuts. Some of the disheartening news, including a nearly 7% drop in Q3 vehicle deliveries, came out two weeks ago and possibly got predigested by the market.

However, shares lost ground as the overnight session continued and some analyst reports noted a cautious tone in the company’s earnings call.

If you’re wondering about the Cybertruck, Tesla said deliveries of that long-awaited vehicle will begin later this year. Tesla also reconfirmed its guidance for 2023 production despite the drop in Q3.

Netflix (NFLX) shares surged after the streaming giant easily beat Wall Street’s average earnings per share estimate and met revenue expectations. Guidance was on the soft side for Q4 versus analysts’ projections. Better-than-expected subscribership growth of 8.76 million might account for some of the stock’s strength. Netflix now has 247 million global subscribers.

After descending sharply from summer highs, shares of American Airlines AAL got a bit of a tailwind in premarket trading after the company beat analysts’ earnings per share estimates and forecast robust demand in 2024. American’s CEO told CNBC the company had its best summer ever and consumers remain in good shape. The company continues working to reduce its debt—a major overhang the last few years.

CSX CSX earnings are due out this afternoon at a time when transports—often seen as a barometer of economic health—have struggled. Large railroads trail the broader market year-to-date, and fuel costs could be another brake on their progress. Shares of Union Pacific UNP got a premarket boost from better-than-expected earnings per share despite a 9.5% drop in annual revenue to just below Wall Street’s expectations. In its release, Union Pacific noted “softness in consumer-related volumes.” The company said challenges also included a drop in carloads and inflationary pressures.

Eye on the Fed

Early today, the probability that the Federal Open Market Committee (FOMC) will raise its benchmark funds rate from its current 5.25% to 5.50% target range following its October 31–November 1 meeting was 3%, according to the CME FedWatch Tool. Odds that rates could be a quarter-point higher coming out of the December 12–13 meeting were about 42%.

“If inflation continues its downward trend despite the strength in the consumer, the Fed should elect to hold rates steady rather than hiking even more,” Schwab Center for Financial Research analysts say in a report.

CHART OF THE DAY:  GREENBACK HOLDING ON. The Dollar Index ($DXY-candlesticks) remains near its 2023 highs but hasn’t added much premium recently despite the geopolitical crisis. It’s now well above its 50-day moving average (blue line), which in turn surged above the 200-day moving average (red line) last month for the first time since the start of the year, often a positive indicator. Data source: ICE. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Beyond the numbers: With earnings season accelerating, it’s easy to get caught up in scoreboard watching. That means focusing on which companies “beat” Wall Street’s estimates and which fell short. While runs, hits, and errors often have a short-term impact on shares, long-term investors might want to dig deeper. Analysts’ estimates tend to be conservative, making it relatively easy for company results to look better than things are on the ground. Also, companies wrestle with high Treasury yields and worker strikes, so the more important touchpoints are those that indicate how they handle these longer-term challenges. “The emphasis throughout reporting season should be less on traditional metrics of beat rate and the percentage by which companies are beating; instead, it should be on longer-term macro messages such as labor as input cost, profit margin protection, pricing power, and the impact of higher yields,” says Liz Ann Sonders, chief investment strategist at Schwab.

It’s not the heat…: There’s concern that a 10-year Treasury note yield in the 5% range might be stressful for investors, but raw numbers don’t necessarily mean as much as the pace at which yields rise. Markets in the past did relatively well with yields at 5% or higher, but the 160-basis-point jump since last spring is the primary stress point now. That’s a historically dramatic pace and makes it much harder for companies and investors to plan. Stability, even at relatively high yields, might be more welcome than this steep climb.

Supply and demand: Unfortunately, issuance of new Treasury note supply isn’t expected to dry up anytime soon with the U.S. government running record levels of debt that need funding. Recent auctions didn’t always impress, hinting that buyers demand higher yields. Additionally, the Fed’s quantitative tightening (QT) that’s shrunk the central bank’s portfolio by more than $1 trillion since mid-2022 means that more buyers need to step up to absorb the increased supply. “That’s likely been a driver of the recent rise in yields, as higher yields are needed to attract those buyers,” says Collin Martin, director of fixed income strategy at the Schwab Center for Financial Research. “All this means even if the Fed says rate hikes are over, yields might not fall too much.”

Calendar

Oct. 20: Expected earnings from American Express (AXP) and Regions Financial (RF).

Oct. 23: Expected earnings from Whirlpool (WHR).

Oct. 24: Expected earnings from Archer Daniels (ADM), Coca-Cola (KO), 3M (MMM), General Electric (GE), General Motors (GM), Verizon (VZ), Microsoft (MSFT), Texas Instruments (TXN), and Visa (V).

Oct. 25: September New Home Sales and expected earnings from Boeing (BA) and IBM (IBM).

Oct. 26: Initial Weekly Jobless Claims, September Durable Orders, Q3 Gross Domestic Product, and expected earnings from Bunge (BG), Comcast (CMCSA), Honeywell (HON), MasterCard (MA), Merck (MRK), Southwest (LUV), Amazon (AMZN), and Ford (F).

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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