Asia Open: There's A Price To Pay For Strong Economic Data

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MARKETS

US stocks are experiencing a clear downward trend on Wednesday due to lacklustre cloud results from GOOGL and a surge in interest rates, prompted by an unexpectedly robust housing report and a "tailing" five-year sale.

For anyone seeking a break from the tumultuous roller coaster ride in the US bond market, Wednesday's developments likely left them queasy.

New Home Sales exceeded expectations in September, contributing to already robust Q3 GDP trackers. This housing market resilience occurred more than one year after the initial spike in mortgage rates and amid an additional rise in the cost of home ownership, perhaps highlighting the resilience of the post-pandemic US economy and consumers. Indeed, many US economists are making another upward adjustment to their Q3 GDP estimates released later Thursday, unquestionably confirming that the US remains the sole major economic powerhouse. 

Unfortunately for stocks, robust economic data comes at an unruly price, with the strong housing market likely contributing to a higher rate environment with 10-year Treasury yields increasing by 13 basis points to 4.95% at one point.

The recent climb in yields comes with the growing consensus that rates are unlikely to return to the ultra-low levels seen for over a decade before the pandemic. The robust housing report will unlikely lead the Fed to believe it has raised rates excessively. Consequently, this higher-for-longer yield environment is likely here to stay, impacting various stock valuations and could negatively affect stock performance into year-end.

BONDS

Open interest data for Tuesday suggested short covering and steepener unwinds. Still, by Wednesday afternoon, yields were cheaper by up to 13bps in a long-end-led selloff that also found 10-year yields up double-digits, sharply bear-steepening the 2s10s.

The market experienced a sense of déjà vu as it was reminiscent of earlier episodes where a tailing five-year bond sale disrupted sentiment. This weakness in the bond auction appeared more pronounced given the expected reasonable bid to cover.

It's worth noting that concerns about supply( and international buyers) have re-emerged due to the presence of a few recent tail auctions in the three-, 10-, and 30-year series, which had initially sparked bearish sentiment right when dovish Fed statements and safe-haven demand hinted at the potential for a rally.

In addition to all the supply concerns, US political developments have introduced potential negative factors about a mid-November US government shutdown that could adversely affect US bond auctions and stock market performance for the rest of 2023.

The market has grown increasingly opposed to auction tails, mainly when traders are keenly focused on the ability of investors to support rising supply. With the Federal Reserve and other price-insensitive investor groups no longer stepping in to underwrite deficits, the concern over sponsorship for increasing supply has been mounting. Additionally, equities are showing signs of being fatigued by the rising rates.

There's significant apprehension in anticipation of next week's refunding. Some market participants have suggested that the Treasury, recognizing the unease, might surprise the markets by increasing the issuance of Treasury bills to help alleviate the supply overhang weighing on long-end sentiment.

As there is still around $1.1 trillion in the Fed's RRP facility, and money market funds hold record assets under management (AUM), it's believed that the market could absorb more bills and do so relatively smoothly.

In the absence of such measures or unless there is an abrupt downturn in the incoming economic data, the longer end of the yield curve, particularly from five years onwards, could face substantial selling pressure at any moment, as was evident on Wednesday.

OIL MARKETS

Real-time commentary in oil markets when geopolitical headline risk rather than macro is driving the bus is an exercise in futility.

Despite EIA's report showing commercial oil stocks increased 1.4 million barrels (bbl) in the reviewed week to 421.1 million bbl, some 5% below the seasonal five-year average, at the end of the day, oil markets remained buoyed by renewed worries over the potential for market disruptions in the Middle East after much of their geopolitical risk premium evaporated during three consecutive session declines.

Oil markets are typically more sensitive to US macro, so perhaps there is some short covering kicking in ahead of what is expected to be a blockbuster Q3 GDP. However, the narrative may have run its course unless we get something close to a 5 % print.

But indeed, the run of strong US macro and China's newfound greater tolerance for leverage at the central government amid more focus on growth than some had thought can not be bad for oil markets. 


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