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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.

Friday, February 3, 2023 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 1/30/23

Other Market Indicators

Market Indicators
2s/5s Tsy Spread-0.620.00
2s/10s Tsy Spread-0.71-0.01
2s/30s Tsy Spread -0.56-0.01
DJIA-30 34,053.94-39.02
NASDAQ 12,200.82+384.50
S&P-500 4,179.76+60.55
Dollar Idx 101.55-0.19
CRB Idx 271.62-0.17

Daily Commentary

Recap – The stock market rally was extended further with the S&P 500 gaining +1.5% whereas the blue-chip Dow lagged (-0.1%). The big winner was the tech-heavy Nasdaq which outperformed with a +3.3% advance. Helping the cause was that Meta (+23.3%) surged the most since 2013 after posting sales that topped estimates and announcing a $40 billion stock buyback.

Treasury yields fell slightly (1 to 3 basis points) across the curve. Interestingly, the DXY dollar index (+0.5% to 101.8) benefited from weakness in the euro and pound despite both the European Central Bank (ECB) and Bank of England (BoE) hiking by 50 basis points.

Want a look at the latest on the consumer stress? Have a read of “Short on Cash, More Americans Tap 401(k) Savings for Emergencies” from the Wall Street Journal (WSJ). A record five million Americans tapped their retirement plans at the Vanguard Group in 2022 to fund their medical bills and foreclosure/eviction notices.

The Challenger job survey is a forward-looking indicator and it reported that job cut announcements soared +136% in but one month (!) in the sharpest increase since April 2020 to 102,943. The year-over-year trend, at +440%, is the highest since July 2020 when the economy was in lockdown mode and is now at the highest since the 2008 recession.

The forward-looking Challenger job survey reported that job cut announcements soared +136% in one month.Source: Bloomberg

The majority of the layoff announcements (40%) in December were in tech. But it wasn’t just the tech sector as layoffs increased in automotive, construction, consumer products, financial services, health care/pharma, media, industrial goods, technology, real estate, retail, transportation and even leisure/hospitality. What is going on here?

The bad news didn’t stop with layoffs. Hiring announcements plunged 36.6% in January and have declined now in three of the past four months. They are down 57.8% from year ago levels as well. Why the Fed focuses on lagged data like the Job Openings and Labor Turnover Survey (JOLTS) and chooses to ignore or dismiss the message from a leading indicator like the Challenger survey that has been around now for over thirty years is truly anyone’s guess.

Bet on the bond market. As Jeffrey Gundlach says, just watch the 2-year Treasury note. It currently yields 4.10%, or 100 basis points below the Fed’s forecast for a 5.125% terminal (peak) funds rate. The last time this occurred was in late 2018, when the Powell Fed back then was also tightening and threatening to do a whole lot more. At that time, the Fed was preaching about the terminal rate going up to 3.125% and back then, the 2-year note yield was just below 2.5% or 65 basis points south of that marker. Who got the call right? The front end of the Treasury curve, that’s who! Fed Chair Jerome Powell was singing like a canary all the next year and the next move was a cut, not a hike. History is so great, isn’t it?

Best read of the day comes from the Wall Street Journal : “The Bosses are Back in Charge”. Are you aware that the capital-to-labor ratio has risen back above pre-COVID-19 levels? So much for the return of worker power. And this has not been lost on long-duration high-quality bonds. To wit: The 30-year Treasury has generated a net positive return of over +8% so far in 2023. As the Fed focuses on JOLTS job openings, the more powerful disinflation message coming from the recent sharp deceleration in labor costs is not lost on the buyers.

To end the week, global equity markets are experiencing a rare down day in the wake of sluggish results from Apple, Amazon and Alphabet which illustrated the impact of weakening global demand on corporate profitability. In addition, guidance from these heavyweights was mixed to negative. Then tack on the miserable results from Ford and Starbucks missing their earnings per share (EPS) target. Not to mention Qualcomm missing on its revenues, in an earnings season that has so far been a bit of a dud. U.S. futures are in the red (Nasdaq down 1.6%). Bond markets are unchanged in advance of the payroll report for January. The benchmark 10-year Treasury yield at 3.39%. On the front end, the two- and five-year Treasury yields are 4.102% and 3.483%, respectively.

On the docket today, it’s all about jobs. Payroll growth is forecast to have slowed to 189,000 from 223,000 in December, while unemployment may have ticked up to 3.6% from 3.5%.

Have a great weekend!

Economic Calendar

January 30 - February 3, 2023: The Week Ahead

Economic Calendar - week of 1/30/23 - 2/3/23

Future Fed Expectations

Source: Bloomberg

Future Fed Expectations as of 1/30/23

Expected Fed Funds Path as of 1/30/23

Select Probabilities based on the Futures
Probability of Fed Funds rate HIKE on February 1, 2023105%
Probability of Fed Funds rate HIKE on March 22, 202383%

**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.