TFC - Wall Street Lunch: Big Moves In The Bond Market

2023-12-14 13:21:00 ET

Summary

• Bond market sees continued volatility as the 10-year Treasury yield falls below 4%.
• Berkshire Hathaway boosts its stake in Occidental Petroleum.
• Check out the global equity focus list report from UBS.

Listen below or on the go on Apple Podcasts and Spotify

10-year Treasury yield falls below 4% from 5% at breakneck speed . (0:15) Retail sales show a surprise gain . (2:17) Influential bank analyst upgrades 5 stocks in wake of Fed. (4:30)

This is an abridged transcript of the podcast.

Our top story today

The epic move in the bond market continues as traders adjust to what many are—maybe prematurely—calling a new landscape for U.S. rates.

The 10-year Treasury yield (US10) fell below 4% for the first time since August. It has plunged down from 5% in late October, seeing swings that strategists say look untethered to U.S. economic forecasts.

The shorter end of the curve has seen even sharper moves. The 2-year yield (US10Y) is below 4.4%—levels not seen since June.

ING says the yields have seen “a remarkable ongoing market move, especially as it has been interlaced with some tailed auctions, indicative of resistance to the falling market rates narrative (in the long end).”

“But there's been little from Chair Powell and the FOMC to stand in the way of this. Recent data has not really validated the dramatic fall in yields.”

They say the fair value of the 10-year is at 4%, but the 2024 path looks to be 3.5%, which “would be an overshoot.”

“If something breaks, we fast-track all of that and jump to a new environment. That has not happened as of yet, but we think the stakes have risen.”

The inversion spread between the 2s and 10s is now below 50 basis points. A 2s10s curve inversion is considered to be a signal of an upcoming recession, but yields are fluctuating sharply as the consensus moves towards the Fed pulling off a rare soft landing.

Goldman Sachs now expects three early-2024 rate cuts starting in March .

Chief economist Jan Hatzius says they forecast “consecutive 25bp cuts in March, May, and June to reset the policy rate from a level that Powell has recently taken to describing as 'well into restrictive territory' rather than just “restrictive” and that most of the FOMC will likely soon see as far offside with inflation trending near 2%."

"We think that January is too soon for the first cut because the FOMC will want to signal it ahead of time in its statement and because the wage numbers are still a bit too high."

The decline in bond yields has helped stocks again after the previous session’s jump. But action is choppy, and the major averages are up less than 0.5%.

The moves today came even in light of some stronger economic data that usually would have caused the bulls to blanche at least a little. Strength was evidenced in the consumer and job markets.

November retail sales unexpectedly rose , up +0.3%, reversing a slump of -0.2% in October and topping forecast for a drop of -0.1%. Core retail sales rose +0.2% vs. expectations of a decline of -0.1%. Sales were even stronger excluding autos and gas, rising +0.6%.

Joseph Brussels, economist at advisory firm RSM, notes that retail sales "advanced 0.3% m/m despite a 2.9% decline in sales at gasoline stations due to falling gasoline prices. Which, of course, bolstered spending on other categories. As inflation falls, real incomes rise, which boosts spending."

Wells Fargo says holiday sales are tracking to come in just below their 5% annual estimate for growth.

“Current conditions are allowing for a decent holiday sales season for retailers, but we are still likely to see the slowest pace of annual sales growth since ahead of the pandemic. The 2023 holiday sales season will be described as still solid but slower.”

And weekly initial jobless claims posted as a surprise drop to +202,000 . But Pantheon Macro says “seasonal pressures will now flip” and claims they should “rise over the next three weeks to about 250K, before dipping back to about 220K in early January.”

Among active stocks

Warren Buffett's Berkshire Hathaway ( BRK.B ) ( BRK.A ) bought close to 10.5 million shares of Occidental Petroleum ( OXY ) this week for nearly $590 million. That comes after the oil company announced a $12 billion deal to buy Permian producer CrownRock.

The stock purchases were done in five separate transactions for $56.31–$57.08 per share. Berkshire is Occidental's largest shareholder and now owns a little more than 27% of the company.

Arista Networks ( ANET ) was added to the Citi US Focus List as its top networking pick for 2024. Analyst Atif Malik, who boosted his price target to $300 from $220, noted the company has "sustainable growth" aided by market share gains and an opportunity in the cloud thanks to Ethernet adoption.

And in the wake of the Fed, Odeon Capital analyst Dick Bove upgraded Bank of America (BAC), Wells Fargo (WFC), U.S. Bancorp (USB), PNC Financial (PNC), and Truist Financial (NYSE: TFC ) to Buy from Hold .

He says the prospect of lower rates, even if they are months away, will boost asset values at the banks as well as real equity, diminishing the need for equity offerings.

In other news of note

The World Health Organization called for a ban on flavored e-cigarettes as a way to stem the rise in popularity.

The group also said additional measures should be taken to reduce their appeal and harm, such as cutting nicotine content and raising taxes.

The WHO said: "Strong decisive action is needed to prevent the uptake of e-cigarettes based on the growing body of evidence of its use by children and adolescents and health harms."

While 34 countries have made e-cigarette sales illegal, 88 have no minimum purchase age, and 74 countries have no regulations in place.

And in the Wall Street Research Corner

UBS has published its global equity focus list . The list is made up of the highest conviction picks from the MSCI All Country World Index (ACWI).

Strategist Rudolf Leemann says the U.S. accounts for about 60% of the names, while emerging markets make up slightly more than 15%. Information technology has the largest weighting, accounting for more than 20% of the index.

Among the names are Baidu (BIDU), Merck (MRK), Meta Platforms (META), Swatch Group (SWGAY), and Yum! Brands (YUM).

For further details see: