Market Observations - Nov 6

Scores so Far:?Crypto 68.0%, gold 8.8%, Stocks 8.2%, HY bonds 4.4%, Cash 4.1%, US dollar 3.2%, Commodity2.0%, Oil 0.2%, IG bonds 0.2%, Gov’t bonds -5.0% YTD.

US Friday Market Wrap: Bulls Host Barbecue to Celebrate Best Week of the Year!

The jobs report today showed a cooling down of the labor market faster than an iced latte in a polar vortex. Analysts expected 180k, but the number came in lower at 150k, missing the mark like a North Korean rocket test.

• Health care and social assistance were the stars of the show, adding over 77k jobs, with ambulatory health care coming in with 32k.
• If private education were lumped in, that number would jump to 89,000. And government employment puffed up with 51k new gigs, hitting pre-pandemic levels.?
• But it wasn’t all standing ovations. Mining, logging, utilities, and retail trade added a measly 2,500 jobs, and information lost 9k, while transportation and warehousing dropped over 12k.?
• Manufacturing took a nosedive, shedding 35k jobs, mostly thanks to strike action. But it’s expected to rebound now that the United Auto Workers union and Detroit’s big three have shaken hands on a deal.
• The unemployment rate did a sneaky uptick to 3.9%, giving the Fed a reason to smile.
• The number of workers laid off rose by 92k, making job security shaky.

On the day, stocks and bonds rallied, with the yield on the US 10-year Treasury falling to around 4.55%, the lowest since September. The Nasdaq outperformed, rising 1.38%, the S&P gained 0.94%, and the Dow rose 222 points or 0.66%. Ten of eleven S&P sectors closed green. Real estate +2.35% led, and energy -1.01% lagged.

Warren Buffet is in love with Japan right now. In the words of Charlie Munger, the decision to invest billions into Japan “…was like having God just opening a chest and just pouring money into it.”?Berkshire Hathaway veered off its usual U.S.-centric course, striking investment gold in Japan. Diving into Japan’s low-interest-rate waters, Berkshire borrowed Yen cheaply to invest in dividend-rich trading houses, turning a $6 billion stake into a whopping $17 billion.

Buffett himself praised the undervalued nature of Japan’s markets at Berkshire’s annual meeting, aligning perfectly with their long-term strategy.

Fed’s Reverse Repo: The Balancing Act Continues:?The Fed’s reverse repo program, the financial world’s favorite parking lot for cash, is seeing less action these days. As the Fed pulls back on its pandemic generosity, the reverse repo’s dwindling numbers are the tea leaves some are reading to predict the end of the bond drawdown bash. But with bank reserves playing it cool, the Fed’s got its work cut out in figuring out when to call it a day on its balance sheet slimming regime.

Ford’s Credit Upgrade Fuels Bond Market Buzz:?Ford’s back to cruising in the investment-grade lane after S&P slapped a shiny BBB- on its credit rating. This upgrade is sending positive shockwaves through the bond markets, with index funds adjusting and junk bond investors on the hunt for the next big winner. Ford’s credit glow-up comes after a labor strike resolution and a fresh $2.75 billion bond issue that had investors lining up like it’s Black Friday. Investment-grade bonds are seeing inflows, but will this be a smooth ride, or are there speed bumps ahead?

The US dollar, which was sold last week after the FOMC and soft employment report, remains on the defensive today. The Antipodean currencies and Yen are struggling, but the other G10 currencies are firm. The dollar is also lower against most emerging market currencies. Still, given the magnitude of the dollar’s pullback, we suspect some consolidation is likely

Overnight Asia Pacific equities rallied, helped by the sharp gains in the US before the weekend. Note that South Korea has banned short sales, and the Kospi rallied nearly 5.7% today. The Philippines allowed short selling for the first time, and its main index rallied 1.5%.

Europe’s SXXP is treading water after rallying every day last week. US futures indices are trading with a slightly firmer bias.

After falling last week, European and US 10-year benchmark yields have come back higher today. European yields are mostly 6-8 bps higher. The US 10-year yield is up a couple of basis points to about 4.60%. The US quarterly refunding begins tomorrow.

Gold is trading slightly softer and is near the middle of its $11 range late in the European morning near $1987. December WTI is also consolidating inside the pre-weekend range but is firmer near $82 a barrel. Saudi Arabia and Russia indicated they supply curbs will persist through the end of the year.

One might be forgiven for thinking that with low nominal and even lower real rates, a negative overnight policy rate, and a deeply undervalued yen, the Japanese economy would be doing well, but it isn't. The economy would have contracted in Q2 if it were not for the strength of tourism, for which the cheap Yen probably played a role. The economy looks to have contracted in Q3. In fact, given the depreciation of the Yen, the Japanese economy may have slipped this year to the fourth largest behind Germany, which has its economic challenges. The final readings showed that despite the better preliminary estimate (51.6 from the preliminary 51.1, down from 53.8 in September), the service PMI is still at the low for the year. The composite PMI stands at 50.5 rather than the 49.9 initial estimate, but that is also the low of the year.

Tomorrow’s King’s Speech in the UK to open the new session of parliament will outline the government’s legislative session that will most likely lead to an election late next year. Today, the market showed little reaction to the construction PMI (45.6 vs. 45.0). At the end of the week, economists expect the UK to report GDP contracted by 0.1% in Q3. The BOE’s downbeat forecasts last week saw the market bring forward rate cuts. The market has discounted about an 80% chance of a quarter-point cut by August 2024. As recently as October 18, the swaps market was pricing in about a 30% chance of another hike.

When the 33k strikers were added back into US nonfarm payrolls, October’s job growth was in line with expectations. The point is that nearly every other component was disappointing. The job growth of the previous two months was revised lower by 101k. The household survey reported a loss of 348k jobs, and the unemployment rate rose 0.1% to 3.9%. After revisions, the average earnings slowed to 4.1% from 4.3%, y/y, and the average work week fell back to its cyclical low of almost 34.2 hours. Aggregate hours fell by 0.26%, the most in two years. The measure of under-employment rose by 0.2% to 7.2%, the highest since early last year. The report is consistent with the slowdown that is widely expected after the heady 4.9% annualized pace in Q3. The early estimates for Q4 GDP appear to be coming in between around 1.0% and 1.5%. This is a light week for important US economic data, but next week will likely see a decline in headline inflation and retail sales.

At recent post-FOMC press conferences, words or phrases seemed to capture the markets’ imagination, like “patience” or “caution.” Perhaps, this time, the most important word was “persistence” about the threshold of the change in rates impacting the monetary policy. The issue was about whether the increase in market rates was due to some of the Fed’s tightening for it. The Fed Chair recognized that short-term movements are noisy and that what mattered for policymakers were persistent moves. About a month after the FOMC’s September FOMC meeting, the 10-year had risen by about 70 bps to 5.0%. Separately, note that today’s quarterly Senior Loan Officer Opinion Survey is likely to point to further tightening of financial and credit conditions, which the FOMC statement seemed to recognize. After the employment report, ahead of the weekend, and this week’s quarterly refunding, the yield briefly traded at 4.50%. In the past two-and-a-half weeks, the US 2-year has fallen from about 5.20% to 4.80%. The implied yield of the December 2024 Fed funds futures settled last week at 4.42%, the least in two months. It was near 4.90% on October 18. Before the weekend, the market was pricing in about 90 bps of cuts by the end of next year. It is now pricing in about 85 bps of cuts.

The global crypto market cap is $1.33T, a 0.53% increase over the last day. Bitcoin is back above $35k, and ETH is above $1,900 for the first time since March!

Alts are following the upward motion, with Trust Wallet Token (TWT), XRP (XRP), and Injective (INJ) being some of the top daily gainers (in top 100 by market cap).

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Please note that Uphold and its affiliates do not provide investment, tax, or legal advice. This message is for informational purposes only and takes no account of particular personal or market circumstances, and should not be relied upon as investment, tax, or legal advice. For investment, tax, or legal advice and before taking any action you should consult your own advisors. Note that digital assets such as cryptocurrencies present unique risks for investors. Please see our disclaimer regarding risks specific to holding digital assets before investing.

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