The Dividend Cafe - The DC Today - Wednesday, October 4, 2023

Episode Date: October 4, 2023

Today's Post - https://bahnsen.co/46j9PPy Following another down day yesterday, we got a little reprieve in markets, with both stocks and bonds posting gains on the day. The biggest economic news on the day was the miss in ADP Payroll numbers, which starkly contrasted with yesterday's big upside surprise in the jobs openings report. More openings but fewer private payrolls could either mean there is a cyclicality or variability around the timing of correlation between the two or could have just been from the number of new job openings TBG just posted this month. Still, either way, the more significant number will be this Friday when nonfarm payroll numbers come out. While yields came off following today's economic data during the trading day, it is notable to see 10-year yields hit 4.88% in overnight trading and 30-year treasuries reach 5%. As a result, US debt interest expense is now just over 14% of tax revenue, which has not been the case since the late 1990s and has historically been a threshold in which fiscal austerity begins to show. Fact notwithstanding, last night, we also saw the ousting of the Speaker of the House, Kevin McCarthy, by his party for the first time in history for getting a bill passed not to cut spending to avoid a government shutdown. I strongly suspect deficits at 7% of GDP during full employment will keep volatility high in Washington as tough decisions must be made. While the Fed says higher rates are here for longer, I remain skeptical, given the tightening financial conditions we have already seen. Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Welcome to the DC Today, your daily market synopsis of the Dividend Cafe, brought to you every Monday through Thursday to bring you up-to-date information and perspective on financial markets. Hello and welcome to DC Today. It is Wednesday, October the 4th. Brian Seitel, good to be with you again here today. And for once, actually, for a nice change, we had an up market. So we had a good day in markets, not amazingly good, but we'll take it. The Dow was up 127 points on the day and Nasdaq was up about point eight percent. And then the S&P was up. I'm sorry. Nasdaq was up one point three. S&P was up point eight. So fairly strong session, which is nice to see. Yields came off a little bit today. We actually, overnight at least, though, we had some high prints on 10s and 30s.

10s printed 488 overnight. We closed at 474 on the day. So they came down a little bit on the day. But that was a higher number than we've seen in quite a while. And 30-year bonds actually went over 5%. So they came down a little bit on the day, but that was a higher number than we've seen in quite a while. And 30-year bonds actually went over 5%. I haven't seen that since 2007. So that was intranight. Then we got some economic data today that cooled things down a little bit.

You know, rates really had been on a tear. And for a long time, rates had, or longer-term rates, had been moving higher because GDP was being revised up and, frankly, growth expectations were coming in ahead of expectations. And those are good things. That's not necessarily a real bad reason to have long-term interest rates go up. But that's sort of decoupled a little at this point. I really do think part of it is because of deficit spending, interest expense moving higher, and I'll sort of go into some of these factors. I wrote about it or talked about it on Wednesday last week, or sorry, Thursday, and I know David spoke a little bit about it on Monday, so I don't want to go over it too much.

But last night, Speaker of the House Kevin McCarthy was removed from office, first time in history, by the Republican Party, so pretty unprecedented. And it was sort of the farther right, I guess, if that's a term of the GOP, you know, wanting spending cuts and wanting a certain bill get passed through Congress on the debt ceiling in order to keep the government open. They didn't get that. And so here we are. There's an interim Fed president and then they'll vote and put someone else in there, most likely Scalise, so long as he's healthy. But we'll see how that goes.

But all these things do matter as far as interest rates. And so we're seeing long end rates go up. We saw today ADP, which is a private payrolls number, come in far lower than expected. It was 89,000. Private payrolls were added. We were expecting about 140,000. It's a big miss. And it's in contrast to what we saw in the job openings number yesterday, which wasn't just because TPG has listed several new job openings, of course,

but nonetheless, kind of a counterintuitive or conflicting data when you have one number saying that there's far more jobs that are posted being open than expected. And then the next day, you get a payroll number that's far, almost half of what was expected. So I just think there's some cyclicality to when those numbers sort of get correlated in there. Friday, we will have the official non-farm payroll number, which will be heavily anticipated. And we're expecting something around 160,000 for the month. But the jobs number coming in a little bit lower was bad news, but good news for markets. The rates are going to stick where they are narrative, a little bit more juice to it. But the one thing of note lately I've seen is we talked about a slowing Chinese economy a few times in this podcast. And because of that, and for other reasons, political reasons, there's

less Chinese demand for US treasuries. And you can see a chart, I don't have it up here, but you can imagine it. There's a correlation between the demand of China from our treasury bonds and the currency, the yuan. And you can just see as their demand for treasuries has gone lower and their holdings of treasuries have gone lower. So is the currency, the strength of the currency is depreciating along with the removal of that tether. I wrote that I was skeptical on Fed. Right now we're running an interest expense of 14% of tax revenues, not of GDP. 14% of tax revenues is going to service the debt because interest rates have doubled or tripled from where they were. If you look at a chart of interest expense and say national defense spending, we're not spending as much on interest payments yet as we are on national defense, but the two charts are looking like they're going to converge at some point. So my point is just when the Fed

says they're going to stay longer, higher on interest rates, there's a lot of monetary tightening that has been done recently without the Fed doing anything. Yes, they're going to stay longer, higher on interest rates, there's a lot of monetary tightening that has been done recently without the Fed doing anything. Yes, they're selling and letting bonds run off of the balance sheet. So you've got quantitative tightening happening. And yes, they've risen increased short-term rates. But aside from that, just financial conditions, interest expense on mortgages, on credit cards, the economy is slowing a little bit. And you're seeing that in some jobs data. And I think it'd be pretty silly for them to go ahead and move again on interest rates, but we'll see. So I'm skeptical there. The deficits, again, hand in hand with higher

long-term rates, deficit spending are now 7% of GDP. So we haven't had that historically, almost ever outside of wartime. And it's when we have full employment. So these aren't necessarily really real good things to go through today, but some positive light, which was markets are up. And then the ISM services data we got today was better than expected. It was actually in line, but expansionary. We're at 53.6. Manufacturing was a little lower on Monday, I guess, in contraction territory, but services is like 78% of the economy. So it just trumps what the slowness in manufacturing is. There was some news out. It isn't official yet, but it's looking more likely that there'll be a strike from Kaiser Permanente with 75,000 of their healthcare employees as they're having some of

their talks sort of stall on their negotiations on prices, which is unfortunate. And then we still have the UAW strike ongoing. GM was able to raise about $6 billion in a credit line to help them fund operations in the meantime. So I'll leave it there. I know that was a whole lot to chew through in one sitting here, but I appreciate you reading, appreciate you listening. As always, tomorrow, we've got jobless claims and some deficit data to go through. And then David will be back with you tomorrow on DC Today. We'll have Dividend Cafe in your inboxes, as always, on Friday. And I'll send you off to your weekend if I don't hear from you.

Send questions. I'd love to hear from you anytime. And with that, I'll wish you a good evening. Thank you. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, and with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC. This is not an offer to buy or sell securities.

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