What happened last week
- Stronger economic data and domestic political turmoil contributed to a resumption of the bond sell-off.
- Stocks reversed early weakness as a better-than-expected jobs release pointed to a normalizing labor market.
- A volatility sell-off in crude oil hit energy stocks, likely to be reversed this week due to increased geopolitical risk.
What we’re watching this week
- CPI for September is the data highlight, while Fed speakers weigh in throughout the week.
- Large banks’ earnings kick off the third quarter earnings season on Friday.
- We are monitoring for Israeli retaliation to the weekend’s surprise attack; a targeting of Iran is a significant risk for markets.
Horizon’s Investment Management Views
- The sell-off in Treasuries continued last week as global stocks defied the move in bonds and closed higher, led by mega-cap tech. Domestic political turmoil likely contributed to the Treasury sell-off; in a historic moment, Speaker of the House Kevin McCarthy was ousted. McCarthy lost control of the House on Tuesday following a last-minute deal with Democrats that narrowly avoided a government shutdown. The 30-year Treasury traded above the key 5% level twice in the past week, the highest since 2007: the first was in the aftermath of McCarthy’s loss of the Speakership, the second on the back of a much stronger than expected nonfarm payrolls print.
- During the initial knee-jerk reaction to the much stronger-than-expected September nonfarm payrolls figure, Treasury yields increased as equities dropped by more than 1%. The market reaction reversed as investors parsed the data, particularly the smaller-than-expected wage rise. Although the labor market remains tight, falling wage pressures indicate that the supply-demand imbalance is normalizing – the Fed is unlikely to tighten further if stronger-than-expected wage gains do not accompany stronger-than-expected job gains.
- Although crude oil tanked by nearly 9% last week, the weekend’s action in the Middle East could reverse this move quickly. Hamas’ surprise attack on Israel and Israel’s declaration of war in response could broaden into a regional conflict. Iran, which has historically financed and supported Hamas, could be targeted by Israel in retaliation, risking an escalation that could disrupt the global supply of crude oil. Even without escalation, investors are likely to price in higher risk premia across the energy sector and differentiate between countries and regions based on their net energy profile.
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