Fixed Income Weekly — 10/11/23
Searching for ways to better understand the fixed income space or looking for actionable ideas in this asset class? Bespoke’s Fixed Income Weekly provides an update on rates and credit each week. We start off with a fresh piece of analysis driven by what’s in the headlines or driving the market in a given week. We then provide charts of how US Treasury futures and rates are trading, before moving on to a summary of recent fixed-income ETF performance, short-term interest rates including money market funds, and a trade idea. We summarize changes and recent developments for a variety of yield curves (UST, bund, Eurodollar, US breakeven inflation, and Bespoke’s Global Yield Curve) before finishing with a review of recent UST yield curve changes, spread changes for major credit products and international bonds, and 1-year return profiles for a cross-section of the fixed income world.
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Bespoke’s Morning Lineup – 10/11/23 – “PPHigher” Than Expected
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“The more I see the less I know for sure.” – John Lennon
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US equity futures are pointing to the fourth day in a row of gains this morning as last week’s oversold levels, positive seasonals, and a lack of escalation in the Middle East have all contributed to the positive tone. The fact that US Treasury yields were sharply lower again after some non-hawkish commentary from Fed speakers like San Francisco President Mary Daly and Fed Governor Michelle Bowman has also helped. The only thing left to get through was PPI, but unfortunately, those numbers were on the hot side.
PPI for the month of September was just released, and the headline reading came in much higher than expected (+0.5% m/m vs 0.3% m/m expectations). The core reading also topped expectations at 0.3% compared to forecasts for a reading of 0.2%. Those readings took the year/year levels to 2.2% (versus 1.6% expectations) at the headline level and 2.7% on a core basis (2.3% expected).
As shown in the charts below, the move higher in headline PPI has sandwiched it right between its pre-COVID average of 1.7% dating back to November 2010 when the current iteration of Final Demand began and its overall average of 2.6%. On a core basis, September’s reading of 2.7% is above its overall average of 2.6% and nearly a full percentage point above its pre-COVID average of 1.8%. There’s still some work to do on the inflation front!
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The Closer – 10y Rejection, GDPNow, Consumer Expectations – 10/10/23
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Looking for deeper insight into markets? In tonight’s Closer sent to Bespoke Institutional clients, we begin with a look at the bond rally (page 1) followed by a dive into GDPNow (page 2). We then look at the horrible 3 year note auction (page 3) and latest sentiment data (page 4) before closing with a rundown of the NY Fed’s Survey of Consumer Expectations (pages 5 & 6).
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Daily Sector Snapshot — 10/10/23
Bespoke Stock Scores — 10/10/23
Aerospace and Defense Take Off
While the conflict between Israel and Palestine is of course still a risk, especially if worries of Iran involvement proves to be more concrete (which we discussed in today and yesterday’s Morning Lineups as well as last night’s Closer), markets appear to be largely looking past the events. Equities have rallied broadly over the past couple of sessions, but some of the best performers have of course been those stocks whose businesses would be most impacted by the conflict. Yesterday, the S&P 1500 Aerospace & Defense Industry rallied 5.45% on the day. That marks the biggest single-day jump in the group since November 9, 2020 and the 20th best day since 1995.
Amazingly, that single-day gain far surpasses other days when war was front and center in the news. For example, last year when Russia invaded Ukraine, the group only rallied 2.21% on the first day of the invasion (although that invasion was more telegraphed so the group rallied ahead of the news). If you look back to various points of the start of the wars in Iraq and Afghanistan, again, the industry did not see nearly as large of gains. For example, on September 20, 2001 when Bush announced the “War on Terror” the group fell 5.93% on the day, and when the US went into Afghanistan (10/7/2001) and later Iraq (3/19/2003), the group gained 1.8% and 0.8%, respectively. When looking to other daily gains of 5%, predominately those have simply occurred during volatile market periods (i.e. Dot Com Era, Financial Crisis, and COVID Crash) rather than times when news headlines would justify the move.
In the table below, we show each member of the S&P 1500 Aerospace and Defense industry as well as their performance from the broad market high at the end of July through last Friday and performance yesterday. Most of these names fell from the end of July through last Friday, and Hexcel (HXL) was the only one to not rise yesterday. Meanwhile, Northrop Grumman (NOC) was the biggest winner with an 11.43% gain. L3Harris (LHX) was also not far from a double-digit daily gain while Huntington Ingalls Industries (HII), Lockheed Martin (LMT), General Dynamics (GD), and Mercury Systems (MRCY) were all up over 5%.
Below we break down each time the Aerospace and Defense industry has rallied at least 5% in a single day without having done so in the prior three months. As shown, yesterday was not the largest jump of those prior 8 instances. Historically, median performance has been stronger than the norm over the next day to three months out with further gains more often than not.
Chart of the Day – Defensives Shredded
September 2023 Headlines
Bespoke’s Morning Lineup – 10/10/23 – Does Three Make a Trend?
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Global markets are picking up the rally where the US left off yesterday. Some of that positive tone is following through to US markets this morning, but equity futures are only modestly higher. Small business sentiment was modestly weaker than expected, and as discussed in this morning’s report, has confirmed the message from a number of other indicators that the labor market is moderating. Bond yields are lower relative to Friday’s close, but they have erased just about half of their initial declines.
In last week’s Bespoke Report, we highlighted the fact that through last Thursday, while most equity indices and other assets were all in steady downtrends over the last few weeks, the dollar was moving in the other direction and steadily rallying. Two trading days later (or one and a half if you consider the fact that Monday was a holiday for some), we’ve started to see a reversal of that trend as assets have been rallying and the dollar’s rally has taken a breather. The dollar’s weakness yesterday was even more notable given the geo-political tensions in the Middle East given the dollar’s typical safe-haven status. It’s only been two days, but as the saying goes, once is random, twice is a coincidence, but three times is a trend.
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