Wall Street Breakfast: Yields Surge

Yields surge

Treasuries sold off sharply early Tuesday after Sept. retail sales figures came in much stronger than expected, while Wall Street’s major averages ended near the flatline. The 10-year Treasury yield (US10Y) jumped to as high as 4.84% on Tuesday, while the 2-year yield (US2Y) rose to 5.22%. See how yields are trading across the curve.

Dig deeper: Retail sales in Sept. rose 0.7% M/M to $704.9B, compared with the 0.3% increase expected, while core retail sales increased 0.6%. The auto dealers category showed a 6.3% Y/Y increase in a positive read-through for retailers including CarMax (KMX) and Carvana (CVNA). The health & personal care stores category, which includes companies like Walgreens Boots Alliance (WBA) and e.l.f. Beauty (ELF), powered 8.3% higher Y/Y. The category that includes Walmart (WMT), Target (TGT), and Costco (COST) showed a 2% Y/Y increase.

Market views: The Sept. retail sales growth rose slightly more than the rate of inflation, breaking a recent trend, Bankrate analyst Ted Rossman said, although he still expects a lukewarm holiday season. Meanwhile, expectations of a more hawkish Federal Reserve grew, as the odds of the FOMC maintaining rates at its Dec. meeting fell to 55%. “Markets are not waiting to hear from Fed officials,” Allianz Advisor Mohamed El-Erian tweeted. He said the yield moves were likely a result of growing economic uncertainty, substantial fiscal deficits, and a “genuine doubt about who will readily absorb the additional supply of government debt associated with high deficits.”

SA commentary: Resilient consumer spending reinforces the view that the U.S. economy likely expanded at a 4% annualized rate in Q3, according to ING Economic and Financial Analysis. “While Fed officials may be coalescing around the view that further rate hikes may not be needed, the prospect of rate cuts is in the far-off future and the yield curve needs to continue repricing for that,” they said. Meanwhile, SA analyst James Picerno noted that statistical odds look increasingly favorable for guesstimating that a yield peak is near, which suggests it’s timely to lift allocations to bonds. (70 comments)

War intensifies

Crude oil futures rose after hundreds of Palestinians were killed in a blast at a Gaza hospital on Tuesday, which rekindled fears of oil supply disruptions in the region. Palestinians have blamed an Israeli air strike for the blast, while Israel blamed a failed rocket launch by Islamic Jihad. As a result, Jordan canceled a summit it was scheduled to host today with U.S. President Joe Biden and Egyptian and Palestinian leaders. Even so, Biden arrived in Israel to meet Prime Minister Benjamin Netanyahu and the country’s war cabinet to understand their plans and objectives. The tragedy in Gaza and the resulting diplomatic setback pushed oil prices higher, with the front-month November WTI crude (CL1:COM) and December Brent crude (CO1:COM) up more than 2% each. (73 comments)

AI factories

Foxconn (OTCPK:FXCOF), the world’s largest contract electronics maker, and Nvidia (NVDA) will join hands to build artificial intelligence factories for various applications, including self-driving cars. At a Foxconn event in Taipei, Nvidia CEO Jensen Huang said these AI factories – or large data centers – will be used for training autonomous vehicles, language-based generative AI and robotics platforms. Foxconn, formally known as Hon Hai Precision (OTCPK:HNHAF), will use Nvidia’s latest chips – including the GH200 superchip that it is not allowed to sell in China – and software to build these data centers. The announcement comes a day after the U.S. unveiled new chip export curbs. (1 comment)

Plans delayed

General Motors (GM) confirmed that it will delay the opening of its second electric truck plant in Michigan by a year. The Detroit automaker pushed back the conversion of its Orion Assembly plant to “better manage” capital investment with evolving electric vehicle demand. “We also identified engineering improvements that we will implement to increase the profitability of our products,” the company said in a statement to Seeking Alpha. Some analysts believe Rivian Automotive (RIVN) can capitalize on the struggles faced by automakers in the electric truck category. The ongoing Detroit strike is expected to slow down the electric truck production timeline for GM and Ford (F), while Tesla (TSLA) has still not set a launch event date for its Cybertruck. (46 comments)

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