Logo for Alloya Investment Services

Daily Commentary

Commentary prepared by Alloya Investment Services, a division of the wholly owned CUSO of Alloya Corporate Federal Credit Union. Alloya Investment Services is a leading broker/dealer consultant to credit unions.

Monday, September 26, 2022 at 8:00 am CT
Commentary prepared by Tom Slefinger, SVP, Director of Institutional Fixed Income Sales, Registered Representative of ISI*, Alloya Investment Services

Market Indications

Historic Treasury Curves as of 09/26/2022

Other Market Indicators

Market Indicators  
2s/5s Tsy Spread-0.20+0.02
2s/10s Tsy Spread-0.510.00
2s/30s Tsy Spread -0.63-0.04
DJIA-30 29,590.41 -486.27
NASDAQ 10,867.93-198.87
S&P-500 3,693.23-64.76
Dollar Idx 113.79+0.58
CRB Idx 268.47-0.37

Daily Commentary

Recap – Mr. Market delivered some vicious, Mike Tyson (in his prime) haymakers to the bulls. The S&P, Nasdaq and Russell 2000 plunged between 4% to 6% on the week. Notably, the S&P 500 wiped out $1.5 trillion in value last week. The peak-to-present drawdown for the S&P is now -23%, while the Nasdaq and Russell are down over -30%. This added to an already challenging year for “bottom pickers” hoping/praying/wishing for a rebound. See “Buying the Stock-Market Dip Is Backfiring. Investors Keep Piling in Anyway” in the Wall Street Journal.

Not surprisingly, after the Fed raised rates by 75 basis points while promising more rate hikes, short term Treasury yields soared. Last week alone, the 2-year Treasury yield soared 33 basis points to 4.20%, the highest level since 2007. Amazingly, this yield has now risen 392 basis points in a year! The longer end saw the 10- and 30-year yields rise 19 basis points and 9 basis points, respectively.

Bloomberg - 2 Year Treasury Yield as of 09/26/22
Source: Bloomberg

This pushed this 2s/30s curve to -57 basis points, the most inverted it has been since 2000.

Bloomberg - 2s30s as of 092622
Source: Bloomberg

Meanwhile the U.S. dollar continues to surge against its major trading partners.

Bloomberg - US Dollar 20 Year high as of 092622
Source: Bloomberg

As we start a new week, bond markets are getting whacked hard again. Notably in the U.K., yields have shot up a further 29 basis points (!) to 4.11%. After the +50-basis points surge in the 5-year gilt on Friday, it has soared another +48 basis points to 4.53%. The gilts market has simply become unglued, and the impact is reverberating around the globe. In the U.S., the two-year Treasury yield has continued its climb higher, now 4.291%. The 5-and 10-year Treasury yields are 4.086% and 3.77%, respectively. The long bond is 3.654%. Meanwhile, the yield curve has headed into a deeper inversion with the 2s/30s spread at a new record low of -64 basis points.

In the meantime, Atlanta Fed President Raphael Bostic is on the tape saying more Fed policy pain is coming our way and stated that job losses will ensue, though he believes they will be modest.

Risk assets also extended their selloff across the globe. Asia was pretty much crushed with the Nikkei trading down -2.66%. Korea and Taiwan were also bloodied with losses of 3.02% and 2.41%, respectively. All in, the MSCI Asia-Pac stock market closed the day down 1.5%. The Euro Stoxx index was down again after succumbing to the big bad bear. In premarket trade, equity futures are pointing to more downside.

Thus far, there are no signs of a let-up in the relentless U.S. dollar strength, which is serving as a wrecking ball for risk assets. The dollar index is consolidating near its toppy-high at 113.7 as the British pound dropped to a record low, heading perilously close to par against the greenback. Gold is stable at $1,641 per ounce. In the commodity pit, West Texas Intermediate (WTI) crude has fallen back to $77.90 per barrel and has now fallen 31% since June. Elsewhere, copper and iron ore (-9% and -18% so far this quarter, respectively) are taking it on the chin. I should add the Commodity Research Bureau (CRB) commodity index is down 13% since May. Call me a contrarian, but I fail to see how this is inflationary.

For a more in-depth analysis of the economy and markets be sure to read this week’s edition of the Weekly Relative Value - Hurricane Jay - to be released later this morning.

The Week Ahead

The key reports this week are August new home sales, the third estimate of Q2 gross domestic product (GDP), Personal Income and Outlays for August, and Case-Shiller house prices for July. For manufacturing, the Richmond and Dallas Fed manufacturing surveys will be released this week. In addition to the economic data, there will be many Fed speakers pontificating about the tightening in financial conditions. Fed Presidents Susan Collins, Raphael Bostic and Loretta Mester (Boston, Atlanta and Cleveland, respectively) speak at events today.

Monday, Sept 26

8:30 am ET: Chicago Fed National Activity Index for August. This is a composite index of other data.

10:30 am ET: Dallas Fed Survey of Manufacturing Activity for September.

Tuesday, Sept 27

8:30 am ET: Durable goods orders for August. The consensus is for a 0.1% decrease in durable goods orders.

9:00 am ET: S&P/Case-Shiller House Price Index for July. The consensus is for a 17.0% year-over-year increase in the Comp 20 index for July.

10:00 am ET: New home sales for August. The consensus is for 500,000 seasonally adjusted annual rate (SAAR), down from 511,000 in July.

10:00 am ET: the Richmond Fed manufacturing survey for September. This is the last of the regional surveys for September.

Wednesday, Sept 28

7:00 am ET: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

10:00 am ET: Pending Home Sales Index for August. The consensus is 1.0% decrease in the index.

Thursday, Sept 29

8:30 am ET: The initial weekly unemployment claims report will be released. The consensus is for an increase to 218,000 from 213,000 last week.

8:30 am ET: Gross domestic product (Third Estimate), GDP by Industry, and Corporate Profits (Revised), 2nd Quarter 2022, and Annual Update. The consensus is that real GDP decreased 0.6% annualized in Q2, unchanged from the second estimate of -0.6%.

Friday, Sept 30

8:30 am ET: Personal Income and Outlays, August 2022 and Annual Update. The consensus is for a 0.3% increase in personal income, and for a 0.2% increase in personal spending. And for the Core personal consumption expenditures PCE) price index to increase 0.5%. PCE prices are expected to be up 6.0% year-over-year, and core PCE prices up 4.8% year-over-year.

9:45 am ET: Chicago Purchasing Managers Index for September. The consensus is for a reading of 52.0, down from 52.2 in August.

10:00 am ET: University of Michigan's Consumer sentiment index (Final for September). The consensus is for a reading of 59.5.

Economic Calendar

September 26 - 30, 2022: The Week Ahead

Economic Calendar - 09/26-30/2022

Future Fed Expectations

Source: Bloomberg

Future Fed Expectations as of 09/26/2022

Expected Fed Funds Path as of 09/26/2022

Select Probabilities based on the Futures 
Probability of Fed Funds rate HIKE on November 2, 2022280%
Probability of Fed Funds rate HIKE on December 14, 2022194%

**All quoted rates are indications and are subject to change without notice.
* ISI is a member of the FINRA/SIPC.

The information contained herein is prepared by ISI Registered Representatives for general circulation and is distributed for general information only. This information does not consider the specific investment objectives, financial situations or particular needs of any specific individual or organization that may receive this report. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities. All opinions, prices, and yields contained herein are subject to change without notice. Investors should understand that statements regarding future prospects might not be realized. Please contact Alloya Investment Services to discuss your specific situation and objectives.