Last Week on Wall Street - Week of September 28th

Last Week on Wall Street

The Bond Market Had a Terrible Week and Stocks Barely Looked Up

Treasury yields climbed to levels last seen before the financial crisis, oil finally gave some ground, and stocks decided the second thing mattered more than the first.

Bonds had a week. The ten-year yield ran to its highest level since before the financial crisis, the long end of the curve went back further still, and by Thursday it had stopped being a purely American problem. Stocks went up anyway. The S&P 500 and the Nasdaq both finished higher, the Nasdaq comfortably so, and the S&P closed within about a percent of its record. That is not the reaction the bond market was going for.

The reason is not complicated. Crude came down, and it came down because Tehran put a timetable on reopening the Strait of Hormuz. That is the first thing the energy side of this inflation story has offered anybody in months, and equity investors took it. Bond investors, who have watched the same shipping lane set the ten-year yield all month, would like to see the ships move before they believe it. In between, President Xi Jinping spent three days in Washington, ate a state dinner with half of Silicon Valley, and went home leaving the existing trade truce extended and not much else changed.

So the week ends with two markets holding opposite readings of the same news. Stocks are pricing the relief. Bonds are pricing the chance it does not arrive, or arrives too late, and that a Federal Reserve already halfway through an argument about a second increase will have to keep going. One of them is wrong. The Committee meets again in late October, and between now and then the ships either move or they do not.

The Bond Rout Went Global, and the Long End Went Back to 2004

The key takeaway, the thirty-year Treasury yield reached its highest level since 2004 this week, and it did not happen alone: Japanese, British and German government bonds sold off alongside it. The thing that set it off was an American economic report that came in too good.

The 30-year yield touched 5.501% on Thursday, a level it has not seen since June 2004, and the 10-year reached 5.223% on the way there. By the close, every point on the Treasury curve except the 2-year, which held near 4.90%, was trading above 5%, a configuration this market has not carried broadly since 2007. The proximate cause arrived Wednesday morning from S&P Global, whose flash purchasing managers surveys printed 57.0 for manufacturing against a 53.6 forecast and 58.7 for services against 55.8, consistent with an economy expanding at its fastest pace in more than five years. A Treasury buyback of up to $6 billion in longer-dated bonds, announced the same day, did nothing to slow the selling.

What separates this from last week is that it stopped being a domestic story. Japanese government bonds, British gilts and German bunds all sold off in the same stretch, which is what tends to happen when the world's benchmark risk-free rate moves and every other sovereign curve has to reprice against it. Federal Reserve Governor Michael Barr added to the pressure midweek, saying more increases will likely be needed to get inflation back to the 2% goal, and futures markets moved to roughly a 66% chance of another quarter point at the October meeting. The awkward part is the feedback loop underneath it: strong growth data now reads as bad news for bonds, so the better the economy prints, the more expensive it becomes to borrow against it.

SOURCE: CNBC: 30-year Treasury yield hits highest level since 2004 →

Tehran Put a Week on the Table, and the Price of Everything Moved

The key takeaway, Iran told a Japanese news agency it could reopen the Strait of Hormuz inside a week if Washington lifts the blockade. Crude fell through the $100 line and kept going. That sentence carries more weight than most diplomatic noise, because this one shipping lane has been setting American inflation expectations all month.

A senior Iranian official told Japan's Kyodo News on Tuesday that Tehran could reopen the strait within seven days if the United States ends its naval blockade of Iranian ports and halts military operations in the waterway, one of seven conditions the country's Supreme National Security Council set out for resuming talks. Brent fell about 3% on the day and broke below $100 for the first time in a week. By Friday's close Brent sat near $99 and WTI near $92, after another decline of better than two percent. Iranian officials spent the rest of the week working intermediaries around the United Nations General Assembly in New York, and a separate report had the Iranian president willing to negotiate before the American midterms.

The distance between a barrel and a kitchen table is shorter than it looks right now. The national average for regular gasoline sat near $4.50 and diesel near $6.50, and on Friday the University of Michigan's final September sentiment reading landed at 48.1, down from 51.7 in August and the weakest since May. The expectations component fell hardest, to 46.3. Unprompted mentions of gas prices reached 31% of respondents and mentions of tariffs reached 35%, up from 24% in July, while rising borrowing costs displaced high prices as the main complaint about buying a house or a car. Joanne Hsu, who runs the survey, noted that consumers do not expect relief at the pump. The market spent this week betting they are wrong about that.

SOURCE: OilPrice: Oil tumbles as Iran floats a Hormuz reopening within a week →

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