In 30 seconds: US Treasury yields are hitting multi-decade highs across maturities, consumer confidence has collapsed well below expectations, and equity markets are experiencing broad deterioration beneath a relatively calm headline index. Oil markets are being shaped by near-closure of the Strait of Hormuz, new tracking data showing ~14.5 million barrels per day in flows, weaker Chinese crude demand, a US Strategic Petroleum Reserve release of up to 40 million barrels, and emergency diesel tax waivers in US states. Brad Setser's analysis reveals China's state sector has intermediated over $700 billion in foreign exchange flows over the past year, with its massive trade surplus being channeled through state banks and policy institutions rather than formal reserves. Fed officials Williams and Barr are pushing back against an October rate hike while signaling one additional 25bps increase is likely appropriate later in the year as inflation remains above target.
The Treasury curve has crossed into territory that demands you sit up straight. With the exception of the 2-year, every maturity is now above 5%, with nominal and real yields at their highest in years. The US 30-year yield hit 5.59%, its highest since 2002. The 10-year yield was trading at 5.21% just before 8 AM ET, then climbed to 5.25% as the opening bell rang. When every maturity but one clears the same round number, you stop calling it a move and start calling it a regime. The consumer, meanwhile, is not taking this well. The September Consumer Confidence Index printed at 81.9, badly missing the consensus estimate of 89.0 and falling from a prior reading of 88.6 (itself revised down from 89.4). The headline index dropped 6.7 points, reaching its lowest level since 2014. The present situation index fell to 109.3 from 117.2, a 7.9pt decline. The expectations index slid to 63.6 from 69.5, off 5.9pt. Confidence fell across all age groups, income levels and political affiliation on growing pessimism about inflation, economy and labor market. And 68.4% of consumers now expect higher interest rates over the next year, up over five percentage points from the prior reading. US economic data has been weaker-than-anticipated across both soft and hard metrics. Equities look calm if you only read the headline. The S&P 500 posted a month-to-date total return of just 0.06%, which sounds like equilibrium until you notice that 8 of 11 sectors are negative on the month, along with 53 of 85 industry groups and 374 individual members. Market breadth has materially weakened. The S&P 500 is caught in a balancing act between rates and earnings, with an eye on 2022 as a possible analog for what lies ahead. The Financials sector $XLF closed in extreme oversold territory for a fifth straight day, for the first time since October 2023. Across the market, fixed income and dividend stocks are showing extreme oversold readings, while Oil $USO, the QQQs $QQQ, Bitcoin $IBIT, and the dollar $UUP remain overbought, although three of those four have pulled back in the last week.
Global oil prices have climbed to the highest since late '22 due to the near-closure of the Strait of Hormuz. Hormuz oil flow estimate: ~14.5 million barrels per day. Brent crude has bounced off $103, and the earlier weakening in prompt timespreads has almost entirely reversed itself. Original SPR release announcement: ~172 million barrels. The US has also urged European nations to release oil from emergency reserves. Meanwhile, Oklahoma is allowing use of untaxed dyed diesel by all users including highway vehicles for the next 120 days, saving users ~24 cents per gallon in federal tax and 19 cents in state tax per gallon. When your emergency energy policy involves telling truckers they can burn the off-color fuel, you have arrived at a particular stage of the crisis.
If you only looked at China's formal reserves, which haven't changed in 10 years, you would conclude that nothing interesting is happening. You would be wrong. The plumbing changed. In the second quarter alone, the entire $200 billion current account surplus was intermediated through banks and other state investors. It is just doing so through channels that do not show up in the headline reserve figure. One thesis holds that China should transact more in CNY, sell any CNY surplus for gold, and sell all excess USD for gold. China's formal reserves haven't changed in 10 years, even as over $3.5 trillion has flowed out through Chinese banks — the accumulation is happening off the headline number. The numbers differ in their details across Chinese data sets, but they all tell the same broad story.
John Williams, the vice chair of the FOMC, delivers notably precise pushback in guiding against an October rate hike that has been getting priced by investors. The new guidance is blunt: "There is no need for urgency." Williams sees the economy as "solid and even showing signs of strengthening" — the kind of assessment that makes you wonder why anyone would rush to tighten further right now. The outlook, though, still calls for action. Two out of twenty is not a trend — it is a rounding error. I count only two months of data consistent with 2% core PCE inflation over the past 20. So the message from both officials converges neatly: the economy is solid, inflation is still too high, one more hike is coming, but not yet. The Fed wants you to know it is patient. It also wants you to know that patience has a limit.
Here is where the labor market stands for your paycheck.
Initial jobless claims: 197,000, down 0.51% on the week
Continuing claims: 1,719,000, up 0.12% on the week
Job openings (JOLTS): 7,079.00, down 3.49% on the month
Quits rate: 1.90, flat 0.00% on the month
Unemployment rate: 4.10, flat 0.00% on the month