Market 10/02: Bond pressure extinguishes rally hopes

Market enters Q4 in dismal negative gamma territory

Although JPM successfully hedged the lower leg collar trade, SPX still starts Q4 in a negative gamma environment below 4300. Here, put gamma still dominates the market with risks of sharp volatility changes (sharp volatility rally) continuing to haunt the market.

Although avoiding the government shutdown this time, investor optimism is short-term with bond market turbulence continuing to disrupt cash flows.

Bond yields at 15-year high after temporary budget deal

10-year Treasury yield hits 4.647%, while 30-year rises to +4.759%. Expectations that yields will cool today after government avoids shutdown completely dashed right from the morning.

The moment the 10-year bond yield surpasses 4.7% means it has risen 40bps since the Fed's September meeting and hits the level right before GFC 2008

Previously, Congress passed a temporary budget allocation to extend government spending by another 45 days. If the situation does not improve, a government shutdown would cause:

1.3 million active-duty military personnel working without pay
Non-essential government employees furloughed without pay
Most infrastructure construction halted
Economy loses 1 billion USD/day
Increased flight delays due to TSA staffing shortages
Many national parks closed across the country.

Banking sector unrealized losses surge under yield pressure

In addition to the burden from declining consumption, banks are struggling because they still hold devalued bonds. In Q2/2023, banks' unrealized losses returned to nearly 550 billion USD, accounting for 25% of equity capital.

Not to mention after the Fed raised rates, over 870 billion USD in deposits have been withdrawn from banks and expected to increase further, marking the largest deposit decline ever.

ISM Manufacturing PMI for September reaches near one-year high

Despite concerning macro news, the ISM survey manufacturing PMI rose to 49.8 in September (from 47.9 in August).

PMI below 50 indicates the manufacturing sector is generally contracting. However, this beat most forecasts which were mostly at 49, thanks to:

Strongest production growth and factory employment since July 2022.
New orders index rises to over one-year high (though still low).

UAW expands strike at Ford and GM factories

By last Friday, UAW expanded the strike at Ford and GM factories. The widespread and prolonged strike continues to cause difficulties for suppliers.

Stellantis dealers reporting parts delivery issues causing difficulties in vehicle repairs and maintenance.
Teachers Federal Credit Union - credit union with total assets of about 9 billion USD announces tightening of auto loan terms.
Reports that Ford is canceling orders for the Ford Lightning electric vehicle nationwide, especially dealer orders. This could affect EV supply and create dissatisfaction in the auto market.

Despite rising car prices and the impact of the widespread strike, auto sales still increased in Q3, up about 15% in the three months to 9/31. This may stem from post-Covid supply disruptions now boosting sales.

Tesla announces Q3 vehicle delivery results

Total deliveries 435,059 vehicles (below 456,722 forecast)
- Down -7% vs Q2
- Up 27% vs Q3 last year
Production 430,488 vehicles
Officially surpasses 2022 full-year vehicle sales in just 3 quarters of 2023