Morning Report: Terrorist attack pushes down bond yields

Posted on October 10, 2023 by Brent Nyitray

Vital Statistics:

Stocks are flattish this morning as the bond market re-opens after a long weekend. Bonds and MBS are up.

We don’t have a ton of data this morning, but we do have a lot of Fed-speak with Raphael Bostic, Neel Kashkari, Christopher Waller and Mary Daly all speaking today.

The weekend terrorist attack by Hamas had a muted impact on the US equity markets and is providing a flight to safety in the bond market. So far, it seems to be having an muted impact on oil prices. While international instability usually causes interest rates to fall, the strong labor market is the biggest factor and will probably remain so, especially after Friday’s big number.

The Mortgage Bankers Association, the National Association of Realtors and the National Association of Homebuilders sent a letter to the Fed, urging them take actions to support housing and the mortgage market. Increased uncertainty about monetary policy have pushed out MBS spreads and increased interest rates.

They point out that shelter accounted for 90% of the increase in consumer prices during the month of July and that the best way to attack housing costs is to help facilitate new home construction.

The consortium urges the Fed to commit to ending rate hikes and to stop letting its MBS portfolio run off until MBS spreads have stabilized. I suspect wide MBS spreads are due more to bond market volatility than to QT. MBS spreads weren’t materially different from historical levels during the era of QE, so I don’t see why QT (which is much smaller in scope) would matter. MBS spreads are being driven by bond market volatility, and I suspect an all-clear signal out of the Fed would go a long way towards stabilizing them.

Small Business Optimism slipped in September, according to the NFIB. This was the 21st consecutive month with the index below the historical average. Inflation and labor shortages were the biggest drivers of the decrease. Small Business owners were increasingly pessimistic about the outlook six months out.

Consumption remains strong as consumers spend on credit, while small business is dealing with a tight labor market: ” They raised labor compensation at record rates to keep workers and fill open positions which are at record high levels. To manage rising labor, energy, and other costs, they raised prices at record high rates and continue to do so, adding to inflation pressures. But they are investing in their firms at historically low rates, primarily because capital spending is financed from the bottom line, and profits have been squeezed by rising input and labor costs and regulatory compliance. Interest rates on their loans have more than doubled and financing is harder to get now.”

Chinese real estate developer Country Garden defaulted on a HK dollar denominated loan. Sales have collapsed, with the first three quarters of 2023 down 44% from the previous period, and September sales down a whopping 81%. The developer has $187 billion in liabilities.

IMO this remains the biggest black swan event in the financial markets. I find it highly unlikely that the world’s second biggest economy could have a Great Depression-esque real estate implosion without any negative credit consequences outside of its country. Western investors and banks will lose money, and that might be the catalyst for the Fed to cry uncle.

Housing sentiment remains dour, according to the Fannie Mae Home Purchase Sentiment Index. “Mortgage rates persistently over 7 percent appear to be deepening the malaise consumers feel about the home purchase market,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. “In fact, high mortgage rates surpassed high home prices as the top reason why consumers think it’s a bad time to buy a home, a survey first. Notably, the share of consumers expressing pessimism about homebuying conditions hit a new survey high in September, with 84% now indicating that it’s a bad time to buy a home.”

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25 Responses

  1. Brent Nyitray's avatar
    Brent Nyitray, on October 10, 2023 at 12:06 pm said:

    Shellenberger’s Woke Psychopathy is on display right now with how the left responds to the Hamas attack.

    Excess empathy for people characterized as “victims” and zero empathy for people characterized as “oppressors.”

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    • jnc4p's avatar
      jnc4p, on October 11, 2023 at 12:46 pm said:

      This was a good observation:

      “Martin Greenwald, M.D.
      Socratic Psychiatrist

      All political factions/groups have their own pathologies and blind spots.

      The current war shows just how much of the motivation behind really far-leftism is rooted in a deep and often unacknowledged sense of resentment that is dressed up as sympathy for the oppressed. The victim is sacralized while being simultaneously stripped of most/all human agency, and treated fundamentally as an object (and a narcissistic extension of the self) rather than a subject. Victories scored by the oppressed then get to be counted vicariously as victories for the resentful and the resentful ego.”

      https://substack.com/@socraticpsychiatrist/note/c-41581250

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      • Brent Nyitray's avatar
        Brent Nyitray, on October 11, 2023 at 12:48 pm said:

        Shellenberger’s framework is why I think antisemitism is not the explanation – good liberals are not antisemitic as a general rule.

        It is about relative position on the Victimhood Totem Pole.

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  3. jnc4p's avatar
    jnc4p, on October 12, 2023 at 8:29 am said:

    Latest debate on the far left, does “decolonization” necessarily entail killing the colonizers?

    https://www.vox.com/world-politics/23911550/israel-hamas-war-gaza-palestine-leftist-democrats

    What the reaction to Hamas has shown me, is that they would justify the same thing here if given the chance.

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  5. jnc4p's avatar
    jnc4p, on October 12, 2023 at 9:07 am said:

    Maybe this will be the event that breaks through the bubble:

    “Moral bankruptcy, political enemies, and fake feminists
    Leftist feminists so left they are engaging in rape apologism in Israel

    Meghan Murphy
    Oct 11, 2023”

    https://www.meghanmurphy.ca/p/moral-bankruptcy-and-fake-feminists

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    • Brent Nyitray's avatar
      Brent Nyitray, on October 12, 2023 at 9:42 am said:

      It won’t, especially since Wokeism is largely a female phenomenon.

      But she does put a finger on the empathy bifurcation: unlimited empathy for those groups designated as victims and zero empathy for those groups designated as oppressors.

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    • novahockey's avatar
      novahockey, on October 12, 2023 at 3:12 pm said:

      “You can gauge someone’s ignorance by the number of phenomena they explain with the same answer,”

      Good line

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    • Kevin S. Willis's avatar
      Kevin S. Willis, on October 12, 2023 at 9:36 pm said:

      “but I differ from the right wingers who think labelling these types “communists” will deter them”

      I don’t think most on the right label them as communists to deter them, they label them as communists to accurately describe them succinctly.

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    • Kevin S. Willis's avatar
      Kevin S. Willis, on October 12, 2023 at 10:01 pm said:

      From the Vox article: “ But I know that if the Israeli Defense Forces do slaughter civilians indiscriminately, the Israeli government will be committing abuses on moral par with those of Hamas.”

      I’m glad there are some in the left who don’t endorse Hamas murdering Holocaust survivors and beheading babies and raping every woman and child they can get their hands on … that really shouldn’t be a hard position.

      But the moral equivalence here is just wrong. Israel is not going in to intentionally kill civilians. They will kill civilians if it is necessary to destroy Hamas’s warmaking capacity. What they are saying is they aren’t going to allow Hamas to win through using human shields.

      These aren’t equivalent. Intentional torture, murder and rape is not the same thing as “we’re going to bomb the building full of terrorist whether your in it or not, so get out, you’ve got 5 minutes” — these are not morally equivalent. Not even fucking close.

      I appreciate the “lefties shouldn’t be applauding the murder and rape of babies and women and children, it’s not a good look” argument, but I don’t find this bullshit equivalence much better. It’s like “I’m going to say civilian murder is bad IN ORDER TO BE PRE-CRITICAL OF ISRAEL”

      Also it’s a weird position to act like you can’t possibly understand why Israel would be prepared for some collateral damage after the Hamas attacks. Emotionally, morally, tactically, logistically—there are so many good reasons for them not to tie their hands in their retaliation.

      And also it’s fucking irresponsible for journalists to be pre-calling Israel’s response a “war crime”, and thus equivalent to what Hamas did.

      Whatever. I fully support Israel’s upcoming warcrimes against the terrorist cult that has killing Jews as part of its founding charter (wonder why all the worrying about Israel’s response never mention that).

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  7. novahockey's avatar
    novahockey, on October 13, 2023 at 10:29 am said:

    My brother once worked on a weaopns system similar to iron dome.
    didn’t really take off. only the Isrealis would buy it.
    Why? I asked.
    his response: well, everyone else on the fucking planet would use counterbattery fire.

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