Ditch your whites and your BBQ, now that summer is (unofficially) over with Labor Day in your rear view window. Most of Wall Street’s attention remains focused on Friday’s jobs report, which showed a more moderate mix of labor market slowdown but not a single slide into recession.
Analysts at BMO point out that the S&P 500’s dividend yield – earnings to price, rather than price to earnings – is now barely higher than the yield on the 10-year Treasury note.
“The decline in dividend yields compared to the rise in interest rates on Treasury bonds and the risks involved in the full faith and credit of the United States (even after a credit rating downgrade), begs the question of how long this dynamic can continue before returning to more historically typical levels by either Higher earnings and say “returns or lower returns for 10 years”.
Tuesday’s initial price action points toward the first – if stocks go down, the dividend yield goes up – but for the move call Of The Day, We will go to the UBS team, who says they are bullish on the bond. (BMO team as well; it is targeting the 10-year low it reached in mid-August at 3.95%).
“Recent volatility in US interest rates has raised the issue of whether we are on the verge of a bond bear market. We do not share this view and believe that nominal yields will fall below our forecast horizon of 0.00-0.00,” says the UBS team led by Mark Hefell, Chief Investment Officer at Global Wealth Management. Six to 12 months for a number of reasons.”
First, they point to Jerome Powell and his staff at the Fed, and say that monetary policy is restrictive. They point out that inflation-adjusted interest rates are now positive, at levels not seen since the 2008 financial crisis, and that mortgage and credit card rates are at multi-decade highs.
And then they say inflation is going down and will continue to go down. Housing inflation – although reflected in official figures with a lag – is abating, and commodity inflation was negative in July.
The UBS team adds that expectations about where prices will end up haven’t changed much. “We do not believe that the US Treasury market has lost its safe-haven appeal and is likely to continue to attract capital. There has also been no material re-pricing above final interest rate expectations, which indicates that the market believes the Fed is nearing the end of heights.
Finally, they say, the recent recalibration of the Bank of Japan’s yield curve control was not the beginning of a larger move upwards in global interest rates. They added, “The movement in the 10-year Japanese government bond yield since the announcement is less than 20 basis points, and we believe the BoJ places a lot of weight on financial stability, so any policy adjustments are likely to be done in a controlled manner.”
They see the best opportunities in the 5-10 term segment in government bonds, investment grade corporate bonds and sustainable bonds.
ES00 US stock futures
It was a little weaker as was the yield on the 10-year Treasury note
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Troubled Chinese real estate giant Country Garden has made two payments of delinquent bonds before the end of a 30-day grace period.
Microchip design firm ARM Holdings said it seeks to price its initial public offering at between $47 and $51 per share, raising as much as $4.9 billion.
It’s earnings season, with C3.ai AI,
Smith & Wesson SWBI
Among the companies that reported results this week.
and Blackstone PX
It is set to join the S&P 500 index, as Lincoln National LNC
and Newell Brands NWL
Economists at Goldman Sachs say the chance of a recession in the US is now only 15%.
Weight loss drug manufacturer Novo Nordisk NVO,
Which overtook LVMH to become Europe’s most valuable company, launches weight-loss drug Wegovy in the UK
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Student loan repayments have already begun to rise, before the federal moratorium officially ends in October. In fact, payments to the Education Department have already risen to a level before the payment pause began, notes Alec Phillips, an analyst at Goldman Sachs. What is likely to happen, he says, is that a small group of borrowers repay the principal on their loans. He says the broader economic impact will hit in the fourth quarter.
The Burning Man Muddy Festival is running out. (Frankly, it doesn’t sound like the disaster we hoped or feared.)
The remains of a 142-year-old schooner have been discovered in Lake Michigan.
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