Treasury Pressure, Magnificent Flight, AI’s Good and Bad, Five-Headed Fed Punch

On the surface, Monday didn’t seem so bad. Sure, the early rally some had hoped for never really manifested much strength. What optimism there was, quickly was dashed as bond traders continued to pressure Treasury securities.

Most traders saw the U.S. government as having postponed their looming shutdown, and not as having completely averted having to turn out the lights and send home non-essential employees. The impasse over spending has not eased. Nor has what to do regarding aiding Ukraine and addressing the still growing multi-year crisis at the U.S. border with Mexico.

The U.S. 10-Year Note was hit hard, its yield soaring about 12 basis points for the session, going out at 4.69%. The 2-Year Note also took it on the chin. That yield popped seven basis points on Monday, as that series paid 5.12% late in the day. Both of these Notes are slightly off of these levels as the wee hours pass on Tuesday morning.

The index has to make a run at its 21-day exponential moving average (EMA) and ultimately its 50-day simple moving average (SMA) for this run towards big tech to sustain. That would also require a daily Moving Average Convergence Divergence (MACD) that sports a bullish crossover of the 26-day EMA by the 12-day EMA and a reading for Relative Strength that moves above 50. All of this is attainable, and would confirm for me a re-bifurcation of our marketplace.

Slowing Deceleration

The manufacturing sector recession within the U.S. economy is improving? Well, not exactly. The pace of this sector’s demise does appear to be slowing, however.

On Monday, the Institute for Supply Management went to the tape with their Manufacturing PMI for September. The headline number printed at 49, which still shows contraction from a month earlier. That said, this print was up from August’s 47.4, so the pace of this contraction does appear to be easing.

New Orders is the single most important component within any manufacturing survey. Here, too, the pace of overall decline slowed from a nasty looking 46.8 in August to 49.2 in September. September, by the way, was the 13th consecutive month of decreasing new manufacturing orders in the United States. Interestingly, though, production moved into expansionary territory at 52.5, and Employment did as well (51.2). Pricing slowed further, moving deeply into contraction at 43.8 from last month’s 48.4.

What does this potentially mean? Quite clearly, though we don’t count chickens until they hatch here, U.S.-based manufacturers are ramping up both hiring and production as prices improve. It would appear that manufacturing in the U.S. is quite possibly headed out of its own apparently isolated economic recession. Now, to keep the much larger service-based economy from taking its turn in the “rose garden.”

The Good and The Bad

Dimon said, “Your Children are going to live to 100 and not have cancer because of technology.” Well, that sounds good. Then Dimon added, “and literally they’ll probably be working three and a half days a week.” Wait. Is that good because human beings, on the whole, will have more free time?

Maybe this is bad, because technology or the advance of AI, will draw more jobs from the economy than it can create. Maybe our children will work less because there will be less work available to human beings, creating intense competition on the supply side of labor markets to fill what demand remains, suppressing wages.

Are you willing to be poor in exchange for more free time? I don’t think I am. There might be some takers, but I don’t think anyone with dependents would sign up for that deal.

Then, Dimon offered up a warning: “Technology has done unbelievable things for mankind, but you know, planes crash, pharmaceuticals get misused.. There are negatives. This one, the biggest negative in my view, is AI being used by bad people to do bad things.” Oh joy.

Five-Headed Breadth Punch

The Fed was out in force on Monday. Fed Chair Jerome Powell and Philadelphia Fed President Patrick Harker participated in a panel on economic growth and labor markets. Neither commented on their near-term expectations for monetary policy. The other three were less timid about speaking their minds publicly.

Almost Dovish… but not really….

Federal Reserve Board Governor Michael Barr (voter) said: “I think it is likely that we are at or very near to the level that is sufficiently restrictive to bringing inflation back to 2% over time. As we watch how conditions evolve, I remain highly attuned to risks to achieving both components of our mandate.”

Hawkish Pragmatism….

Cleveland Fed Pres. Loretta Mester (voter in 2024) said: “I suspect we may well need to raise the fed funds rate once more this year and then hold it there for some time as we accumulate more information on economic developments and assess the effects of tightening in financial conditions that has already occurred.” Mester then added… “Whether the fed funds rate needs to go higher than its current level and for how long policy needs to remain restrictive will depend on how the economy evolves relative to the outlook.”

Release the Hawks….

Federal Reserve Board Governor Michelle Bowman (voter) said: I continue to expect that further rate increases will likely be needed to return inflation to 2% in a timely way. I see a continued risk that high energy prices could reverse some of the progress we have seen on inflation in recent months.”

Today’s Earnings Highlights (Consensus EPS Expectations)