Where to now? September is regarded as the worst month of the year for the markets with the climatic event occurring in October. The markets are devoid of liquidity, and direction is primarily determined by momentum and technology-based trading, the direction of which is heavily influenced by five-word headlines.
It is widely accepted that the markets are complacent to the numerous geopolitical issues, issues that some believe are the most significant since 1941.
Speaking of complacency, the national debt is soaring and neither candidate is remotely addressing perhaps the greatest issue faced by governments. Many believe we are on the verge of a global reset.
The prevailing question is who is going to buy the debt that is maturing and at a what cost, debt that is significantly more expensive than it was issued and is growing at unsustainable rate.
It is often stated the markets require a “Wall of Worry” to move higher. If one utilizes the VIX or fear gauge, complacency is still extreme. Yes, the VIX is off its lows but is 75% lower than its peak
Perhaps the bond market is still an efficient discount mechanism. Short end yields, which are the most sensitive to monetary policy changes, are slightly higher than where they were about a week ago. Where the markets expect short end rates to end on December 31, 2024, is also unchanged from a week ago.
Writing it differently, swaps had fully discounted Fed policy for the remainder of the year several days before the meeting.
As widely discussed, the market forecasts [and market discount mechanisms] have been entirely wrong for at least 24 months. A stopped clock is correct two times a day is perhaps an appropriate axiom for today’s outlook.
Perhaps a significant outcome of the FOMC meeting is the possibility that the neutral level of interest rate could be higher than it was before the pandemic.
Are Treasuries perhaps pricing in such a change? Yields on the short end are barely changed from over a week ago but yields on the long end—defined as ten years or more—are up between eight and twelve basis points causing the yield curve to steepen for a fifth straight week, the longest streak since October 2021 according to Bloomberg
What will happen this week?
The economic calendar is comprised of several housing statistics, a sentiment survey, some manufacturing statistics and the monthly PCE data.
Last night the foreign markets were mixed. London was down 0.13%, Paris down 0.20% and Frankfurt up 0.54%. China was up 0.44%, Japan up 1.53% and Hang Seng down 0.06%.
Futures are flat. There are several Federal Reserve officials speaking today. Will they add any further color to the outcome of last week’s FOMC meeting? The 10-year is off 2/32 to yield 3.75%.
