Financial Conditions Tighten
August 17, 2023
–Stocks and bonds sliding lower. SPX yesterday -0.8% and Nasdaq Comp -1.15%. Ten year yield +3.7 bps to 4.256%. SOFR contracts from June’24 to June’27 down 3 to 4 bps. As of this note, TYU trades 109-105, having settled 109-18 yesterday. On the front TY contract at the time, 109-115 was the lowest settle last October. This morning $/yen at new recent high 146.16 and $/cny at new high 7.3122 (right at the high of last November). There are reports of China selling dollars to stem the slide, which likely adds pressure on US treasuries. Interesting tweet from Althea Spinozzi (SaxoBank) notes that Japan’s 20y auction tailed the most since 1987, “showing that investors require a higher yield to buy JGBs. Rising JGB yields threaten bonds worldwide…”
–Today’s news includes Philly Fed, expected -10.2 from -13.5. Jobless Claims 240k.
–The big change is a fairly rapid tightening of financial conditions in the past two weeks or so. Dudley, the former president of NY Fed listed 5 factors for financial conditions, Short rates, long rates, value of the USD, stocks, corporate spreads. Long rates have taken out last year’s highs, DXY made a new low sub-100 in mid-July and is now 103.5, big tech has rolled, corporate bankruptcies rising. Tendencies are self-perpetuating.
–Below is a clip from the latest Atlanta Fed GDP Now, which simply plugs new data into the model, and spat out 5.8% for Q3 GDP estimate. Real …(REAL) gross private domestic investment increased to 11.4% and REAL personal consumption to 4.8%. Those values seem wildly high to me unless there is inventory hoarding going on.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2023 is 5.8 percent on August 16, up from 5.0 percent on August 15. After this morning’s housing starts report from the US Census Bureau and industrial production report from the Federal Reserve Board of Governors, the nowcasts of third-quarter real personal consumption expenditures growth and third-quarter real gross private domestic investment growth increased from 4.4 percent and 8.8 percent, respectively, to 4.8 percent and 11.4 percent.
