JTSorrell
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The 10-year Treasury yield jumps more than 20 basis points in two sessions. (0:15) Writedowns continue to hamper Goldman earnings. (2:00) The Animal Spirits Index shows spooked investors. (3:47)
This is an abridged transcript of the podcast.
Our top story so far
The bond market is seeing another monster move, with prices tumbling and yields jumping for the second session in a row.
The 10-year Treasury yield (US10Y) is surging close to 4.85%. On Friday, it was trading at just above 4.60%.
The 30-year yield (US30Y) is close to 5%, and the 2-year (US2Y) is also rising.
Traders sold bonds following the September retail sales figures, which came in much stronger than anticipated. The headline rose 0.7%, compared with the 0.3% forecast. The control group was up 0.6%.
Wells Fargo says, “Consumers are looking for nothing but a good time, and it is hard to resist seeing the upside risk to the outlook.”
They are “spending more at bars and restaurants, at auto dealers, and online. That’s true on both a monthly basis and on trend over the past year,” they added.
Expectations of a more hawkish Fed grew following the report. The chance of the FOMC keeping rates steady at the December meeting dropped to 55% in the fed funds futures market.
Allianz adviser Mohamed El-Erian wrote in today’s FT that the bond market, which he calls “the most influential segment of the world’s financial markets,” is “losing its longer-term strategic anchors and is at risk of losing its short-term stabilizer ones as well.”
He says reasons include increasing uncertainty on the path of the U.S. economy combined with a Fed also shrouded in uncertainty on where equilibrium should be. Add to that “”substantial fiscal deficits that show no signs of significant moderation” and, despite rising interest rates, a “genuine doubt about who will readily absorb the additional supply of government debt associated with high deficits.”
Among the early earnings highlights
Goldman Sachs (GS) reported Q3 revenue that beat estimates thanks to the strong performance of its Assets & Wealth Management business. But earnings were again marred by writedowns as part of Goldman’s plan to reduce principal investments within Asset & Wealth Management and exit parts of the consumer finance sector.
Bank of America’s (BAC) Q3 topped earnings expectations, aided by higher interest rates and strength in its Global Markets business. CEO Brian Moynihan says BofA “added clients and accounts across all lines of business” in what he calls “a healthy but slowing economy that saw US consumer spending still ahead of last year but continuing to slow.”
Johnson & Johnson (JNJ) reported better-than-expected Q3 results as its pharma segment exceeded expectations. For the full year, J&J tightened its sales guidance and bumped up its earnings guidance.
Lockheed Martin (LMT) slipped after a decline in quarterly earnings and cash flow. Free cash flow fell 7.4% from a year earlier to $2.75 billion. Net earnings declined 5.3% to $1.68 billion.
In other news of note
Loop Capital started coverage on Microsoft (MSFT) with a buy rating. Analyst Yun Kim put a $425 price target on the stock, saying the company’s growth is likely to accelerate due to its two most strategic businesses, Azure and products based on generative AI.
Meanwhile, Chinese internet search giant Baidu (BIDU) unveiled its latest generative AI model, Ernie 4.0, a potential rival to OpenAI’s GPT-4 model. Baidu’s Co-Founder Robin Li introduced Ernie 4.0 and other AI applications at the company’s annual flagship event, Baidu World 2023.
He says, “ERNIE 4.0 has achieved a full upgrade with drastically improved performance in understanding, generation, reasoning, and memory.”
And in the Wall Street Research Corner
The Wells Fargo Animal Spirits Index showed investors “spooked for the spooky season,” with all components falling last month.
The ASI, named after a term for consumer behavior coined by John Maynard Keynes, tumbled to 0.1 in September from 0.69 in August.
Economist Azhar Iqbal says: “There are some cracks in the economy beginning to appear, and the downtick in September’s ASI seems to reflect that.”
The five ASI components are the S&P 500 (SP500) (NYSEARCA:SPY) (IVV) (VOO), the Conference Board’s Consumer Confidence Index, the yield curve spread between the 10-year (US10Y) and 3-month (US3M), the VIX (VIX), and the Economic Policy Uncertainty Index. The last two inversely impact the index.
“While core inflationary pressures continue to ease, households are being placed under increasing amounts of stress as interest rates continue to rise and growth in real disposable income has faltered,” Iqbal added, saying there is a decent chance the ASI turns negative this year.
