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SATURDAY RECAP |
The Fed raised rates for the first time in three years. The two year moved 13 basis points. The thirty year moved one, the wrong way. Crude ended the week where it sat the day before the pipeline was hit. Six themes made the week. |
Five sessions. One hike.
Last week we asked what sets the price of long money. The usual answer is the policy rate. This week it finally moved, so the question got a clean test.
The long end declined to answer.
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Monday, the chip index fell 5.9% after three AI chief executives spent the weekend calling for slower development.
Tuesday, crude settled at $105.83, its high for the move. Wednesday, the Fed raised rates and the Dow lost 631 points. Thursday, the Bank of England held and froze bond sales, and stocks took Wednesday back. Friday, Japan hiked, crude broke, and yields rose anyway.
For the week the Dow fell 1.7%. The S&P 500 finished at 7,646.04, flat. The Nasdaq rose 0.7%. The VIX closed at 14.81.
Six themes ran the tape.
The hike landed at the front of the curve. Nowhere else.
The Fed raised its target range a quarter point to 3.75% to 4% on Wednesday, its first increase in three years. The vote was unanimous with no dissents. Of 18 officials, 12 put the rate a quarter point higher by year end. Four put it half a point higher. Two wanted to stop here.
Now the week in yields. The two year rose from 4.63% to 4.76%. The ten year rose from 4.96% to 5.01%. The thirty year fell one basis point, to 5.34%.
A 25 basis point hike moved the front end 13 basis points and the long end not at all. The gap between two year and thirty year money shrank by 14 basis points in five sessions.
The Read
Last Sunday we said the two year trades the vote and the thirty year trades the dots. The two year traded the vote. The thirty year traded nothing. That is a market pricing a policy cycle, not a debt problem.
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The Fed took energy out of its own inflation statement.
July's statement blamed "supply shocks that have driven price increases in certain sectors, including energy." That clause is gone. So is the reference to the conflict in the Middle East, replaced by a line saying domestic spending has been resilient.
Five and a half hours earlier, the control group of retail sales rose 1.4%, its best reading in close to two years. Headline sales rose 1.2% against a consensus near 0.8%.
Kevin Warsh was blunt. "The plain fact is that inflation is too high and has been for too long." He gave no guidance on October or December.
The Read
The Fed just reclassified the shock. It was a supply problem in July. It is a demand problem now. That is why October stays live even if crude keeps falling, and why the front end moved the way it did.
Crude gave back the entire war rally. Bonds did not care.
WTI settled Friday at $96.08, down 5.7% on the day. It settled at $96.05 on September 9, the day before the Saudi pipeline was hit. The whole move is gone.
Nothing underneath it was fixed. The East-West pipeline is still shut. War risk insurance for tankers still runs about 40 times pre-crisis levels. Eight ships crossed the Strait of Hormuz on September 13, against a normal day of about 85.
Note what did not happen. Crude fell 5.7% on Friday and the ten year rose seven basis points. We wrote on Wednesday that every oil reprieve gave bonds room to breathe. On Friday it stopped working. Brent ended the week down only 0.7%, so the American barrel repriced and the global one did not.
Watch Signal
Cheaper oil bought the bond market nothing on Friday. If that holds, the rates trade stops being an oil trade, and the next crude rally stops being a bond story.
The fuel bill is already signed. Cheaper crude arrives late.
Diesel is the tight spot, not crude. One tracked retail price read $6.285 a gallon, about 8% above the 2022 record. Distillate stocks are roughly 14% under the five year average. The 3-2-1 crack spread sits near $64, close to a record.
J.B. Hunt (JBHT) put a number on it. The carrier fell 12.9% on Wednesday after telling investors third quarter earnings would drop 5% to 10% from the second. It named $25 million of driver costs and at least $10 million of fuel. Werner (WERN), Knight-Swift (KNX), Old Dominion (ODFL) and XPO all fell with it.
Diesel reaches shelves four to eight weeks after the pump. Friday's crude break does not touch that.
The Read
Relief in the flat price and relief in the cost base are about two months apart. The Fed meets again in six weeks. The order matters.
The Bank of England faced the same problem and picked the other side.
On Thursday it held its rate at 3.75% on a 6 to 3 vote, with inflation well above target. The three dissenters wanted a hike.
Then it did what the Fed did not. It paused sales from a 488 billion pound bond portfolio for six months, and halted sales of long dated gilts entirely. Gilt yields had climbed all morning in London. They fell after the announcement.
Andrew Bailey said energy costs have so far had a limited effect on British prices and wages.
The Read
Two banks, one problem, opposite answers. The Fed took the inflation side and left its long end alone. The Bank of England took the long end and left inflation running. Watch which one reverses first.
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The index barely moved because the cost landed on things that do not trade daily.
Start with what did not pay. The chip index fell 5.9% on Monday. It finished the week up 0.8%. It absorbed a hike, two more abroad, and its own safety scare.
Now the bill. Lennar (LEN) missed on earnings and revenue and cut its full year delivery target again. The stock fell about 4% on Friday. Mortgage rates sit near 7%.
Further down it is worse. Fitch puts private credit defaults at 6.1% over the twelve months through July. Houlihan Lokey marks 12% of borrowers under $20 million of earnings below 90 cents, against 3% for the largest.
Watch Signal
A 5% long end does not break markets evenly. It breaks the borrower who refinances this quarter. The S&P was flat and the VIX closed under 15 because those borrowers are not in the index.
Here is what the week settled.
The hike is a front end event. The market priced it as a policy cycle, and the thirty year sat still through all of it. That is a cleaner answer than last week's selloff suggested.
Here is what it did not settle.
The long end is still expensive and nobody made it cheaper. Crude round tripped without repairing a pipeline or reopening a strait. The fuel already bought is still working through the cost base. And on Friday, falling oil stopped pulling yields down with it.
The Fed says this is about demand now. The next six weeks decide whether it was right.
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