The shift from Fed to Treasury

While most financial media was focused on this week’s Federal Reserve meeting, most market participants shifted their focus to the Treasury’s Quarterly Refunding Announcement (QRA). Each quarter, Treasury announces what debt it will issue (borrow) to re-finance existing maturing debt. This week, the Treasury announced that they would issue $776BN in the coming quarter, which is $76BN less than previously estimated. Importantly, it shifted the issuance from long-term treasuries to short-term treasuries.

• The market has been very focused on the long-end of the US treasury curve (10-30yr), which has been rising dramatically in recent months
• One of the reasons, which we have written about, is the significant amount of borrowing the US treasury has to do to finance the current fiscal deficit
• Given that the Treasury shifted its borrowing from the long-end to the short-end (bills), long yields sold off (came down) dramatically
• Combined with an expected Fed announcement of a continued pause and a somewhat dovish press conference, the 10 yr bond traded from close to 5% to close to 4.5% over the next several trading sessions
• This is a very big move in a short time and also served as fuel for risk assets (stocks) to go higher
• While the decision to use short-term versus long-term debt helps alleviate any immediate concerns, it does not address the fiscal deficit
• Unless the government can cut the budget or raise taxes, neither of which seems likely in an election year, this will continue to hang over the markets

Job market cools just enough

The government released the October Non-Farm Payroll numbers this morning, showing employment increased by 150,000 and the unemployment rate ticked up to 3.9%. This was below estimates. In addition, prior numbers were revised down by a total of a little over 100k jobs. Average hourly earnings were up 0.2% month over month and 4.1% year over year.

• The release caused stock futures to reverse higher
• Combined with the dovish Fed speech, this solidified the view that interest rate hikes are likely done
• While this is evidence that the Fed’s tightening cycle is finally feeding through the real economy, we think markets are focusing too much on this data
• Any incremental interest rate hikes from here would not make much of a difference
• Instead, it is important to pay attention to long-term rates and earnings guidance from companies

Apple beats but guides lower

Apple (AAPL), the largest market capitalization stock, reported earnings this week. The results came in slightly better than expected. However, the initial stock reaction was lower due to its guidance. Apple sees overall revenue for the December quarter being about flat with the year-ago period; consensus estimates have called for revenue to increase 5% from a year earlier. Apple has reported four consecutive quarters of declining revenues.

• Apple is the largest weight in the S&P 500 at 7.2%
• The company has had no revenue growth for over a year
• AAPL trades at a 27x multiple, a nearly 40% premium to the market
• With a high valuation and limited growth, Apple could see its multiple mean-revert lower
• Given the large weight in the indices, it could be a headwind for passive index investors