A Federal Reserve meeting, Apple earnings, and a monthly jobs report are all scheduled for this week. However, investor attention was captured on Monday by a different announcement from the US Treasury.
On Wednesday, investors will receive a quarterly refunding update, revealing the amount of bond supply the US government plans to put into the market next quarter. The fact that investors are interested in such details reflects a significant shift in how they track market-moving factors as 2023 comes to a close.
“For the past year and a half, the only thing that mattered was the Fed story,” said Blake Gwinn, Head of Rates Strategy at RBC Capital Markets. “What mattered was how much the Fed is going to hike and where the terminal rate is going to be.”
However, Gwinn points out that these outcomes now feel largely determined.
The market is pricing in a 98% chance that the Federal Reserve will keep interest rates steady at its meeting this week. Debate over another rate hike has mostly been pushed out until December and January. Even then, investors mostly agree that only one more increase, if any, will occur during this hiking cycle.
Therefore, after more than a year of the Fed’s decisions driving the market, investor focus has shifted to other factors that may impact stocks to varying degrees.
Third quarter earnings have had a decent start, but they haven’t significantly affected the major averages. Tensions in Washington have strategists concerned about a government shutdown, but few predict market turmoil at this point. The implications of the growing conflict in the Middle East on stocks remain unclear.
All of this brings us to the quarterly refunding announcement, and the real reason it matters: Yields.
Gwinn believes the emphasis on Wednesday’s announcement is likely because of its contribution to the rise in yields back in August, rather than any surprising government bond issuance details.
“It was certainly justified for everyone to start talking about term premium and that yield movement,” Gwinn said. “But I don’t expect this refunding to significantly impact that story. I don’t anticipate any major revisions this month that would surprise the markets.”
In the short term, market strategists believe the bond selloff “pain trade” is not yet over, so the key market story revolves around the potential impact of any news on Treasury yields.
“Yields are the center of attention,” says Callie Cox, a US investment analyst at eToro. “They have been for the past few months. So anything that could affect investors’ perception of yields is certainly something to watch, even if you’re not a bond investor.”
Looking ahead, the biggest market question is not just about how high the Federal Reserve will raise interest rates or how long rates will stay high. Investors are now focused on the lagging impact of over 500 basis points of interest rate hikes on the outlook for companies and the overall economy.
“The pressure from the ten-year yield has made investors worry about the future, wondering if something could break,” Cox said. “That may be the narrative for the following days and weeks – what could break?”
Josh Schafer is a reporter for Yahoo Finance.
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