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Good morning. Yesterday, snack and sweet drinks giants such as Mondelez, Coca-Cola, Pepsi, and Kraft-Heinz were among the biggest losers among big cap US stocks. One reason for this may be a soft earnings report from ConAgra, the packaged food company, which highlighted consumers cutting back on spending. Another intriguing factor is the impact of injectable diet drugs on grocery purchases, according to the CEO of Walmart. If you have the long pharma/short junk food pair trade on, email us: [email protected] and [email protected].
Banks will start reporting their third-quarter earnings next week. Expectations for the group are currently low and falling as bank indices underperform the wider market and certain banks’ shares look weak. Rising long-term interest rates may be a contributing factor, leading to marked-down securities portfolios. While these losses won’t directly affect capital or earnings, they are disclosed and can make investors nervous. It’s worth noting that rising long-term interest rates have been well-known for some time, so why the sudden drop in bank stock performance? Another explanation may be weak third-quarter earnings reports with falling margins and rising deposit costs on the liability side of banks’ balance sheets. Loan growth has also been steadily declining. One reason for this weakening loan growth may be banks’ efforts to cut weight and maintain return on equity amidst rising capital requirements. Another possibility, and perhaps the most compelling one, is decreased loan demand due to higher interest rate policies, which in turn sparks recession fears among investors.
We highlighted a significant change in the Treasury market where the term premium on 10-year Treasuries has turned positive again. This term premium is compensation for interest rate risk. The rise in the term premium could potentially drive the 10-year yield even higher, which may impact stocks and the economy. There are several possible explanations for this increase in the term premium, including higher expected rate volatility, higher expected inflation volatility, increased uncertainty surrounding US solvency and/or political stability, a sharp rise in Treasury supply, growing sensitivity to Treasury demand, a decrease in reach-for-yield dynamics, and the end of the four-decade bond bull market.
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For more details on the American nightmare, check out our recommended newsletters: Swamp Notes for expert insight on the intersection of money and power in US politics, and Chris Giles on Central Banks for a guide to money, interest rates, and inflation.
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