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By Nicholas Jasinski | Monday, October 21
All That Glitters. Stocks got off to a muted start to what will soon be a very busy week. Some 110 S&P 500 companies are scheduled to report third-quarter results this week.
The S&P 500 slipped just 0.2% on the day, but it was a worse day for most stocks in the index: just 81 of its components closed in the green today. The Nasdaq Composite eked out a 0.3% gain, lifted by big tech giants, while the Dow Jones Industrial Average slid 0.8%. The three major U.S. indexes are sitting on six-week winning streaks.
Tomorrow's earnings highlights will come from General Motors, Lockheed Martin, and Verizon Communications, among others.
Over in the bond market, yields continued to rise. The yield on the 10-year U.S. Treasury note added 0.11 percentage point today, to hit 4.18%. That compares with its 3.62% yield just before the Federal Reserve's September policy meeting, when officials dropped their short-term interest rate target by half a point.
At the time, markets were worried about slowing economic growth and priced in a lot more Fed easing in the coming months and year. Since then, the U.S. data has been almost uniformly solid and the tone coming out of the Fed has been cautious about rushing into additional near-term rate cuts.
It suggests a slower and shallower descent for interest rates than traders were pricing in five weeks ago, and that has been reflected in Treasury yields across the maturity curve.
There's also likely some angst about future U.S. government spending and borrowing that has been pushing up longer-term Treasury yields lately, with all the focus on the upcoming election and little appetite for balancing the budget from either side of the political aisle.
But the winningest asset of all in the current backdrop? Gold.
The safe-haven metal hit another record high today, at about $2,725 per ounce. The gold price is up 32% in 2024, or nearly 10 percentage points better than the S&P 500.
Here's Barron's Ian Salisbury:
Indeed, with just a few weeks before the U.S. presidential election, it remains to be seen whether Vice President Kamala Harris or former President Donald Trump will win the White House. Yet, as Bank of America notes, neither candidate has a plan to fix the debt. Trump tax plans call for adding about $7.5 trillion in new debt, according to the Committee for a Responsible Federal Budget. Harris’s would add half that, or $3.5 trillion.
What’s more, the U.S. isn’t the only nation going into the red.
“Spending commitments are likely to rise, as countries adapt to and tackle climate change, demographics become more challenging and defense spending likely goes up too,” writes Bank of America Commodity Strategist Michael Widmer.
All that borrowing might sour investors on sovereign debt, including Treasury bonds, making gold more attractive by comparison.
“With lingering concerns over U.S. funding needs and their impact on the U.S. Treasury market, the yellow metal may become the ultimate perceived safe haven asset,” adds Widmer, who reiterated his $3,000 price target for gold.
It's not just investors piling into gold, helping to amplify the gains. Central banks around the world have been big buyers this year. U.S. retail investors have likewise been pouring money into gold funds.
Read more on gold from Ian.
DJIA: -0.80% to 42,931.60
S&P 500: -0.18% to 5,853.98
Nasdaq: +0.27% to 18,540.00
The Hot Stock: Builders FirstSource +5.2%
The Biggest Loser: Kenvue -5.5%
Best Sector: Technology +0.5%
Worst Sector: Real Estate -2.1%
Contradictory Monetary Policy?
For all the attention on the Federal Reserve’s possible interest-rate moves in 2024 and beyond, there’s another area of policy that’s boring by comparison but nearly as important: the Fed’s steady reduction in its balance sheet, known as quantitative tightening.
Never mind the cognitive dissonance of simultaneously easing policy by lowering rates and tightening by shrinking the balance sheet. For now, no news is good news, as far as the Fed’s balance sheet is concerned.
The balance sheet is key to the Fed’s implementation of monetary policy. Banks hold reserves at the Fed, on which they earn a risk-free return that effectively acts as a floor for rates across the financial system. It is used to guide the federal-funds rate—the Fed’s primary benchmark interest rate, which it cut to a target range of 4.75% to 5% in September. Banks and other financial institutions can also lend their U.S. Treasury holdings to the Fed in exchange for cash to meet liquidity needs, in transactions known as “repurchase agreements,” or repos.
During times of financial crisis or stress, the Fed can use its balance sheet to quickly inject cash into the economy and keep the gears of credit turning. It did so forcefully during the pandemic: Assets on the Fed’s balance sheet ballooned from about $4.2 trillion at the start of 2020 to nearly $9 trillion at its 2022 peak, as it purchased vast quantities of U.S. Treasuries and mortgage-backed securities.
Since March 2022, the Fed has been shrinking its balance sheet, which was down to $7 trillion this past week. Officials slowed the process in June. The Fed is currently allowing up to $25 billion in Treasuries and up to $35 billion in mortgage-backed securities to mature monthly without reinvesting the proceeds.
By allowing those securities to run off without buying new ones, the Fed is slowly reducing banking reserves, meaning less cash to lend. That should put upward pressure on bond yields.
That’s seemingly at odds with Fed rate cuts. Federal Reserve Bank of San Francisco President Mary Daly explained the contradiction as one of timing. “The interest-rate adjustment is like a speedboat, and the balance sheet is like a tanker ship,” she said at a New York University event last week. “And the question is, do you want your main policy tool to wait on the tanker ship to turn in order for it to turn?”
For Fed officials eager to characterize rate moves as “normalization,” shrinking the balance sheet to pre-crisis levels fits the same logic. A well-telegraphed, slow-and-steady drawdown is unlikely to have much economic impact, argues Fed Gov. Christopher Waller, in contrast with rapid balance-sheet growth in a financial crisis.
Waller said at Stanford University last week that he isn’t concerned about a September 2019–like experience—during an earlier round of QT—when the repo market briefly seized up and the Fed responded by boosting reserves.
Waller compared the Fed’s balance-sheet moves to firefighters. “You have a bad economic outcome, you pour water on the fire, and then when the fire’s out you drain the water away,” he said. “And when the water drains away, the fire doesn’t restart. That’s the asymmetry of the policy action.”
For now, reserves are “abundant,” based on a new metric unveiled by the New York Fed. The Reserve Demand Elasticity, or RDE, tool shows that reserve shifts currently have little impact on the fed-funds rate, meaning the Fed can comfortably continue QT into 2025, barring an unexpected economic or financial shock.
Policymakers want to keep shrinking the balance sheet until reserves are merely “ample”—a know-it-when-you-see-it level of cash. That appears to be a ways off, and officials are sanguine about getting there without breaking anything.
The Calendar
3M, Baker Hughes, CoStar Group, Danaher, Enphase Energy, Freeport-McMoRan, Fiserv, GE Aerospace, General Motors, Genuine Parts, Invesco, Kimberly-Clark, Lockheed Martin, Moody’s, Norfolk Southern, NVR, Paccar, Philip Morris International, PulteGroup, RTX, Seagate Technology Holdings, Sherwin-Williams, Texas Instruments, and Verizon Communications announce earnings tomorrow.
What We're Reading Today
- Boeing’s Striking Machinists Make $115,000 a Year. Here’s How Much They Could End Up Earning in New Deal.
- Spirit Stock Soars. The Budget Airline Finally Has Some Good News.
- Turns Out, Tesla’s Cybertruck Is a Hit
- Taylor Swift Might Be Target’s Version of Costco Gold Bars
- Millennials Aren’t Falling Behind After All. This Data Reveals the Generation’s Deeper Problem.
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