Market 10/10: Bond stabilization helps buyers completely dominate the market

SPX breaks above 4400, market lacks sellers

US stock market continues to rally on Tuesday morning with buyers completely dominating the market all morning. Bonds yield drops sharply after extremely optimistic statements on interest rate policy from FOMC members, helping money flow back to value stocks which have fallen too much recently.

With shorts-cover rally/technical bounce from 4200 to 4300 ended, buyers push SPX to touch call wall at 4400 with buy volume completely dominating both NYSE and NASDAQ. However, above 4400, the market is “overextended” temporarily at least until end of Thursday when volatility from PPI and CPI reports disappears. Up to 12pm Central, money flow is still rotating quite evenly with mega cap tech temporarily weaker than the market.

However, today's noon auction of 46 billion 3-year bonds shocked as yield rose to 4.74% from sold level of 4.723%, the largest spread since 02/2023. Although the auction wasn't too large, it created clear conditions for buyers to take profit and the market also started to become “over-extended”. With upcoming PPI and CPI reports, end-of-day de-risk is entirely possible.

Yields surge, Fed officials signal they will continue to keep interest rates steady

Top Fed officials are unanimous that: "Tighter financial conditions after sharp rise in Treasury yields could temporarily substitute for raising interest rates higher".

• Dallas Fed President Lorie Logan said the recent sharp rise in long-term U.S. government bond yields shows the central bank may not need to raise rates again.

• Fed Vice Chair Philip Jefferson said he will “continue to note the tightening trend in financial conditions as bond yields increase”.

• Fed official Bostic:

  • Inflation has improved significantly, but there is still a long way to go

  • No need to raise interest rates further

  • If things turn out differently from my view, Fed may have to raise rates but that's not my current view

Market pricing 88.4% chance Fed will keep rates steady at November meeting.

Bond yields drop across the board after officials' comments.

30-year mortgage rates continue to rise, highest in 23 years

30-year mortgage rate rises to 7.95%, highest since July 2000.

Meanwhile, demand for home purchase mortgages has hit the lowest level since 1995. The sharp drop in demand but rising rates is due to supply shortage.

Average interest rate on U.S. credit card balances has risen to nearly 23%. With data from 1994, this is the highest rate in history.

U.S. NFIB Small Business Optimism Index for September continues to stay low

This month's reading is 90.8, down from 91.3 in August, marking 21 consecutive months below the 49-year average of 98. Business expectations index drops sharply to -43.

23% of business owners report that inflation remains their biggest problem in business operations. Labor quality is also a major concern.

PepsiCo Q3 results beat expectations

PepsiCo $PEP reports Q3 results beating analyst expectations, while raising 2023 earnings forecast.

• EPS: 2.25 USD, higher than expected 2.15 USD

• Revenue: 23.45 billion USD vs expected 23.39 billion USD

• Organic revenue, excluding acquisitions and divestitures, up 8.8% from previous quarter.

Sluggish economic recovery, China considers new stimulus package

According to insider sources, policymakers are considering issuing at least 1 trillion RMB (137 billion USD) in additional government debt for infrastructure spending. This could push this year's budget deficit much higher than the 3% cap set in March.

To boost the economy, Chinese government has used various stimulus measures like cutting MLF rates or injecting more money into banking system, but overall economic outlook remains bleak.

China's property index continues to fall into recession territory.

Recently, Chinese property developer Country Garden failed to repay international loans due in September.

Other news

1. Unity CEO was fired last night and the Board of Directors is replacing this position with the former CEO of RedHat.

   • $U has dropped 40% from its summer peak, mainly because they tried to implement a new model for developers and it backfired.

   • $U is trading at 26x EV/EBITDA, very reasonable because EBITDA is expected to grow from $340 million in 2023 to $1.4 billion in 2027 and possibly higher if Vision Pro succeeds with Apple.

2. IMF adjusts 2024 global inflation estimate up to 5.8%

3. A barrage of missiles was fired from southern Lebanon towards Israel. US special forces have arrived in Israel and are considering action to rescue American hostages in Gaza, Pentagon officials said.

4. Israel's Shekel has fallen to its lowest level against the US Dollar since January 2016