Is good news now good news? And is bad news now bad news? I think we can be there. Think about what happened last week – CPI cold data paired, finally, with a subdued Retail print. Wholesale prices they were also much softer than expected, as seen in October’s PPI figures. Not surprisingly, the interest rate landscape has changed dramatically from just a month ago.
Recall in mid-October how fear of debt repayment drove long-term interest rates much higher – north of 5% on the 30-year. The benchmark 10-year rate rose to 5%. Today, the entire curve is printed below. For the first time in this cycle, in fact, the yield on money market mutual funds is above that of short-term bonds.
The Treasury yield curve falls
Headline and headline CPI trending lower
The keep a hold of rating on the iShares 1-3 Year Treasury Bond ETF (NASDAQ:Shy). Going a bit out on the duration front is probably wise while keeping cash in a 5.4% money market fund should work for the next few months.
ABOUT BACKGROUND, SHY features a modest annual expense ratio of just 15 basis points and liquidity is strong with the fund tracking the 1-3 year portion of the Treasury curve. Average daily volume is high at more than 3.3 million shares and the 30-day average bid/ask spread is just a single basis point. The fund’s current yield to maturity, the key yield measure that investors should watch with a product like this, is back below 5% (4.9% as of November 16, 2023) after being above that psychologically important level for months whole.
SHY: Latest yield now < 5%
Lowering its yield is the reality that the Fed has ended up raising rates. The holiday week data table is light, but we’ll get a slew of critical economic reports during the last week of November and the first trading session of December. If we see continued weakness in the labor market, the Fed could feel the heat to not only hold off at the next FOMC meeting, but possibly cut its target policy rate early next year. The previous annual CPI lagged housing indicators look healthy and any job losses, if they occur, would warrant the need to flatten the Treasury rate curve.
Ex-Shelter Basic Services CPI Facilitation
Meanwhile, corporations are winding down what has been an excellent earnings period. The third quarter reporting season has proven much stronger than strategists expected. An 82% EPS beat rate is the best in about two years and the headline numbers were good. However, it was not all rosy. The collective guidance ratio for the fourth quarter was completely negative two to one. The result was a 2023 EPS forecast that was almost unchanged at around $220 with $247 in S&P 500 earnings per share next year.
End of S&P 500 earnings season
What else am I looking at as we head into the end of the year? Keep an eye on movements in the US Dollar Index. It broke below the key 105 level earlier this month – a further pullback could set the stage for the SPX to move closer to all-time highs.
It’s not just about the big caps though. Small caps typically do best after a Fed tightening cycle ends, and while quantitative easing is ongoing, a lower 12-month policy rate could be particularly beneficial for beaten-down names in the S&P SmallCap 600 Index. and the Russell 2000 Index.
The US Dollar Index breaks support
On the commodity front, there are further signs of disinflation. Along with Walmart (WMT) citing deflation in its third quarter earnings report, WTI’s sharp drop from $95 to, at times last week, below $75 is a clear warning sign that the bullish situation may become more little sure. Headline CPI will almost certainly be lower given the pullback in WTI and retail gasoline prices. Used car and truck price tags also fell in the latest reading of the Manheim Used Vehicle Value Index.
WTI is down 20% from its peak in September
Used vehicle prices fall further
Looking ahead, we will get key reports in the coming days, including Existing Home Sales, Durable Goods, FOMC Minutes, Jobless Claims before Turkey and US PMIs on Friday.
Main economic data
On the earnings front, NVIDIA (NVDA) headlines AMC Tuesday, but don’t discount the impact from other key companies including Zoom (PA) on Monday afternoon. Tuesday’s pre-market is packed with reports across sectors, but with a consumer focus: Kohl’s (KSS) Medtronic (MDT), Lowe’s (LOW), Buy Best (BBY), Baidu (BEGINNING), Abercrombie & Fitch (ANF), DICK’S Sporting Goods (DKS), American Eagle Outfitters (AEO) and analog devices (DO YOU KNOW) all case results.
Nordstrom (JWN), Urban equipment (UrbaN), and Guess? (GES) round off the profits from retail sales. A read on the global industrial picture comes from Deere & Company (OF) on Wednesday before the bell.
Earnings by touch
I have a rating held at SHY. It’s a good place to put money right now, but as the chances of a rate cut increase, expect its yield to drop and reinvestment rate risk to increase.