Global bond yields continue to climb, higher discount rates ahead

July 7, 2023
wwblog@smartest-data.blog

HIGHER BOND YIELDS, A PROBLEM FOR STOCKS?

Stock indexes Thursday closed moderately lower, both stocks and Treasuries fell on Thursday. This followed the release of U.S. economic data for June. All in all this turned out to be stronger-than-expected. The ADP employment survey revealed that companies added the most positions in June.

BOND YIELDS

In total companies added +497,000, thus exceeding predictions of +225,000. This now at the highest rate for 16 months. The U.S. trade deficit in May was negative $69.0 billion, compared to a negative -$74.4 billion in April.

The data for June indicated that the U.S. ISM services index increased more than predicted. The June ISM services index increased by +3.6 points to a 4-month high of 53.9. Thus exceeding the consensus estimate of 51.4. This led to increased concerns that the FOMC will raise interest rates more aggressively.

BOND YIELDS
Weekly initial jobless claims in the United States increased by +12,000 to 248,000. This data point was somewhat higher than the +245,000 expected. While weekly continuing claims declined -13,000 to a 4-month low of 1.720 million. Thus indicating a healthier labor market than the 1.737 million expected.

The S&P 500 Index (SPY) fell -0.79%, and the Nasdaq 100 Index (QQQ) closed down -0.75%.

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BOND YIELDS AND the Fed’s hawkish statements

Stock and bond prices were also impacted by the Fed’s hawkish statements. The statements suggested that current data supports the idea that the Fed has more work to do on monetary policy. There is the increasing expectation of a 25 basis point rate increase at the next FOMC meeting on July 25-26.

At this point the market consensus that the Fed Funds rate will peak at 5.40% by year end. Currently 32 basis points higher than the current actual federal funds rate of 5.08%. Please watch the video below as to how the Fed Funds rate is determined.

UK bond yields are around a 14-year high

Along with global bond yields, U.S bond yields continue to climb. The 10-year T-note yield is reaching a 4-month high of 4.043%. The 10-year German bund yields closing in on a three-and-a-half month high and closed at 2.626%.

The remarkable event was the 10-year UK Gilt yield is around a 14-year high of 4.66%. OK, so after all this action in bond yields, are the global bond markets headed for a breakout? The data is starting to point in that direction. With the two-year Treasury yield over 5% was perhaps the most surprising number as it is an unusual event.

Keep in mind expectations for future EPS growth

Last Friday Federal Reserve announced that the banks sailed through the stress tests. Even under a scenario of a harsh recession. Following the announcement, the banks JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC). Also, Goldman Sachs (GS) and Morgan Stanley (MS) all increased their third-quarter dividends.

Bank of America (BA), followed with an increase to its quarterly common stock dividend. The dividend will be raised to 24 cents per share from 22 cents per share beginning in the third quarter of 2023.

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Titan International (TWI)

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The rally in mega cap tech stocks

Driving the stock markets in 2023, apart from earning has been a combination of the following. One key one has been the end of the 15-month long rising interest rate cycle. There is the growing expectation of the Fed adopting a more dovish posture to monetary policy. There is possibly another 50 basis points in rises in the pipeline. But while inflation remains outside the target range don’t count your chickens, so to speak.

The rally in mega cap tech stocks has been ignoring monetary policy since the beginning of the year. The rally has been due to their restructuring process and a rebound in earning. Then given a further boost by actualization of the monetization of the boom in Artificial Intelligence. What is clear is that despite the rise in interest rates, or normalization of interest rates. There has been an increased liquidity in the stock markets.