Take Wednesday Off

This is macro horizons episode 399. Take Wednesday off. Presented by PMO Capital Markets, I'm your host Ian Lingen, here with Veil Hartman and Delaney Choi to bring you our thoughts on the trading desk for the upcoming week of November 9th. And with Veterans Day on Wednesday marking the unofficial beginning of the holiday season, all we can say is that we hope AI isn't releasing the Grinch from captivity. Each week, we offer an updated view on the U.S. rates market and a bad joke or two. But more importantly, the show is centered on responding directly to questions submitted by listeners and clients. We also end each show with our musins on the week ahead. Please feel free to reach out on Bloomberg or email me at [email protected] with questions for future episodes. We value your input and hope to keep the show as interactive as possible. So that being said, let's get started. In the week just passed, investors learned of the blue sweep and the implications for the AI build out as well as fiscal spending going forward. There's also the regulatory concerns that many have had now that the Democrats control both the House and the Senate. It's important to keep in mind that the transition of power doesn't happen until the beginning of January, so there will still be time for issues such as another continuing resolution to address the debt ceiling to be passed by the GOP before the end of the year. It will be an interesting political period to be sure as we learn of any attempts by outgoing lawmakers to set the stage for 2021 and 2028. Clearly, the passing of the midterms was seen as a potential inflection point for the conflict in the Middle East. Interestingly, Trump has been downplaying the potential for near-term escalation with Iran, and instead the emphasis has been on sanctions and allowing diplomacy to once again play a role in the conflict. The degree to which this has translated through to lower energy prices has been relatively significant. After trading up at effectively 105 for the front-month WTI contract, crude oil futures have slipped to below 90 at one stage in the week just past and are stabilizing in an all-too-familiar range. On the macro front, we also saw a notably stronger than anticipated headline payroll sprint of 165,000 jobs added during the month of October. Even September was revised up to 60,000 versus the 29,000 prior. The unemployment rate ticked lower to 4.1%, but on an unrounded basis, the move was from 4.175 to 4.141. So a very small one-tenth of a percent decline. The household survey also improved up 463,000 jobs compared to September's edition of 406,000 jobs, and average hourly earnings came in a bit firmer than expected. So as a theme, there was nothing within the labor market update that would suggest the December rate hike assumption should be called into question. As it currently stands, the market is priced in roughly a 70% probability that the Fed delivers a 25 basis point rate hike next month, and we see no reason to fade those odds. With the one caveat being, the price action in the equity market, i.e. the sharp sell-off on AI concerns associated with the Democrats now controlling Congress, could see further follow-through, which would then tighten financial conditions, and tighter financial conditions could in and of themselves be a sufficient reason for the Fed to delay hiking rates until Q1 or beyond. That being said, as this year has made abundantly clear, wagering on a downward trend in the equity market has yet to yield a great deal of satisfaction, at least outside of a few clear episodes. The most notable event to come out of this week was the landslide victory by the Democrats in the midterm elections, who will take the majority in both the House and the Senate beginning in January 2027. Though the initial response was positive for both stocks and bonds, Thursday saw equity sell-off dramatically in a move sparked by concerns regarding what increased AI regulation might mean for the pace of the AI buildout and its continued ability to drive growth. A bearish correction in tech stocks was the driver of the move with the Nasdaq down nearly 6% over the course of the day on Thursday. Now, we're cognizant that this isn't a new narrative, with the 30+ basis point rally in 10s in October, and particularly the severity of the move in the latter half of the month largely a function of flight to quality flows as the sustainability of the AI buildout came into question. As the market continues to mull over the implications of the blue sweep, the equity sector remains in focus as a key driver of the current macro narrative. Even the outlook in the Middle East, an October strong non-farm payroll support has taken a backseat to the price action in the tech sector in the extent to which the current repricing may be marking the start of a broader downtrend versus an opportunity for dip buying that could spark a retracement of the bearish move. It's also very notable that the safe haven dynamic between equities and treasuries has once again been reiterated by the pre-cent price action. Recall that throughout much of 2025, there was a cell US asset sentiment, so that was cell stocks and bonds rates went higher, equities came under pressure. That narrative subsided earlier this year, but then was renewed at some moments at least following the beginning of the conflict in the Middle East. Over the last few months, we have seen a return to this traditional correlation, which speaks well to treasuries as an asset class going forward. Now, it is the case that term premium is higher, and that fiscal concerns will continue to linger, but given that the Democrats control Congress and Trump controls the White House, the forward path for additional fiscal initiatives seems very narrow at best. The last two years of Trump's presidency will likely see an increase in special investigations in and around issues of corruption, as well as a concerted effort on the regulatory side with an eye on providing guardrails for AI. And in keeping with the discussion of politics, the Democrats' resounding victory in the midterm elections could make the debt ceiling a powerful source of leverage for the party to extract concessions from the Trump administration in 2027. To avoid negotiating a future debt ceiling increase from a position of weakness, Republicans have an incentive to raise or suspend the debt limit before congressional control changes hands in January. So, between now and your end, the GOP could attempt to pass a budget reconciliation package that would not require Democratic votes, although success would require unity at a time when the party faces internal divisions and is recalibrating its priorities ahead of the 2028 presidential election. In our latest client survey, we asked whether the GOP will pass a final reconciliation bill before the 120th Congress is seated. Responses were nearly evenly split with a slight majority 51%, expecting Republicans to fall short of passing a final reconciliation bill before the new Congress is sworn in in January, while 49% expect a bill to be passed before the deadline. It strikes us that if Congress fails to address the debt ceiling issue before your end, financial markets could face a protracted debt ceiling standoff in 2027, raising the risk of sovereign debt downgrades, price distortions around the projected estate, and increased volatility in cash and repo markets should Treasury draw down its general account to deploy extraordinary measures. Recall that in 2023, the market reacted to the imminent debt ceiling crisis through the extreme cheapening of near maturity T-bills. As it currently stands, the US is roughly $800 billion below its $41.1 trillion borrowing limit, and the government could potentially hit that ceiling as soon as Q1 of next year if not sometime during Q2. And this suggests that the ex-date could be as early as Q3. Now the bill curve isn't yet showing any pronounced distortions around the projected estate, certainly not of the sort we've seen during prior debt ceiling episodes like in 2023. However, it is something to be on guard for as your end approaches, as well as any congressional attempt to take the 2027 debt ceiling risk off the table during the lame duck session. And in contemplating the forward outlook for the 120th Congress, it strikes us that there are several implications for the Fed outlook as well. The hearing on Fed Governor Cook has been delayed until December 14, but should Trump ultimately be able to oust Cook, it's more than likely that he isn't able to nominate a successor and have them confirmed by the Senate before the new Congress is seated. Framed differently, Trump would need to contend with a demo Democrat led Senate and will likely face resistance when trying to appoint another fed board member. And while the cook hearing is more near term and obviously represents a potential scenario within the realm of possibilities pending the White House hearing and any succeeding challenges, this scenario will become a legitimate concern when Powell, whose term expires in January 2028, eventually vacates a seat. Recall that Worsh was confirmed as the 17th chair of the Federal Reserve in a 54-45 Senate vote, a largely party line vote. In fact, only one Democrat in the Senate crossed party lines to vote in favor of confirming Worsh's fed chair, and it was the narrowest margin by which a fed chair has ever been confirmed since Senate approval to become fed chair became a requirement in 1977. The initial Senate banking committee had voted 13-11 to advance his nomination to the full Senate floor, and that was also a vote along party lines, with the narrowness of the margin enabling Republican Senator Tillis to wield his vote to hold up the confirmation until the investigation into Powell was closed. Said differently, the confirmation environment for Trump has shifted entirely. The Democrats will now have majority control on the Senate banking committee on top of their majority in the Senate, posing a new challenge for Trump to be able to successfully nominate his candidate choice from Powell to be a kid to seat. There has been some chatter that the results of the midterm election have created a bit more flexibility on Worsh's part as the fed attempts to contain forward inflation expectations. We'll argue that any incremental decline in potential political pressure on the fed chair could only have a slight impact at best on Worsh's and the committee's policy stance. At the end of the day, what we have seen is that the Worsh Fed is taking a very similar approach to adjusting monetary policy based on the realized data and the committee's policy objectives. Said differently, the Worsh Fed is not that different than the Powell Fed, which was not that different than feds that have gone before. It is a committee they need sufficient votes to change policy, and that it's important to keep in mind as we consider the upcoming results from Worsh's set of task forces designed to evaluate and potentially recalibrate the inputs and strategy for implementing monetary policy. And transitioning to the outlook for treasury issuance, there are funding announcement triggered a short-lived cheapening in the long end of the curve after coupon auction sizes were left unchanged for the upcoming quarter. While there weren't any immediate changes to coupon auction sizes, the treasury department modified its forward guidance to signal that issuance adjustments are on the table for 2027, but not necessarily in the first half of the year. Instead, coupon auction sizes will probably be a story for the second half of 2027, with the statement itself saying that treasury anticipates maintaining nominal coupon auction sizes for the next several quarters. And our read is that changes are unlikely until the August 2027 refund at the soonest. And until the next round of increases to coupon auction sizes, the US treasury appears committed to using the bill market to meet additional borrowing needs. For context, treasury's presentation at T-back estimated a $332 billion increase in bill issuance in Q4 followed by a $532 billion increase in Q1. Expanding bill supply over the coming months and quarters certainly isn't without risk, even though the treasury department says that it continues to see strong demand for bill securities from a broad range of market participants. Notably, T-back expressed some caution regarding the market's ability to digest greater bill supply. In its report to the Treasury Secretary, the committee noted that money market fund assets have leveled off, and the bill market has started to show some signs of price sensitivity, something that resonates with the recent cheapening of bills versus OIS. We've also seen a firmer tone in the repo market so far in November, with sofa rising above the IORB rate by the most since April 15. And not only has the sofa spread to policy rates reached its widest level since tax day, but the typically swift normalization of month and repo pressures has been conspicuously absent. While the Fed hasn't conducted any reserve management purchases of T-bills for the past few months, we think they'll likely be resumed at a modest pace before your end, if not in the first quarter of 2027. In transitioning back to the economic outlook, one reason that's been cited as a leading driver of the blue sweep by pundits, reporters, and politicians alike is the affordability crisis. The average price of gasoline in the United States is up by more than 30 percent on a year over your basis. And consumer confidence, as measured by the conference board, is currently tracking near some of the lowest levels and years among lower income households. And this brings into the spotlight the severity of the disconnect between the aggregate economic statistics and the health of the average U.S. household that's struggling with rising prices at a moment of declining real purchasing power. Note that within this month's U.M. sentiment survey, it was noted that purchasing power continues to dominate consumer views of the economy. And yet, the hard data doesn't necessarily showcase this. GDP growth is strong, fueled by aggregate consumption data that hasn't yet shown signs of strain, and that's largely because the upper quartile has continued to uplift the spending metrics as the wealth effect propels overall consumption. In fact, major equity indices are still positive year-to-date despite the recent bearish correction. It does bring into question, however, the extent to which a significant correction in equities that brings stocks down, say, 10 percent or more on the year, might quickly spiral bringing into relevance the pace at which the ripple effects on spending and consumption could begin affecting the broader economy. And that's something that's complicated the picture for the Fed as it continues in its tightening cycle. Chair Worsh had noted after the Fed September hike that the least well-off are the ones who have the most to gain from stable prices. But on the other side of the equation, as uncertainty regarding the forward outlook for the AI build out increases alongside volatility, financial conditions have tightened, and if the move extends significantly, it would bring into question the prudence of a December Fed hike. And frankly, that is the biggest wild car for whether or not the Fed is going to go in December. Even if we have a relatively benign inflation print on Tuesday, the Fed's underlying motivation for hiking rates has been the fact that inflation has been above target for more than five years, rather than in response to any local trend in prices. So with purchasing power still under pressure and inflation on a year over year basis remaining elevated, with evidence that super core inflation remains sticky, the justification for the Fed to hike in December remains well intact regardless of the next CPI print. In the event that financial conditions are tighter as a function of a spike in equity vault, following a more significant sell-off in the tech sector, which is accompanied by contagion into other parts of the equity market, that's the recipe for a pause. At the moment, that doesn't seem particularly likely, but there are still several weeks between now and the December meeting. And from a technical perspective, it's been reassuring to see the safe haven status of US treasuries affirmed over the last month or so, with 10 year yields well off the peak of 536 seen in early October. The return to the typical risk-on-risk off-relationship between stocks and bonds has been a constructive development for treasuries as an asset class. 480 is the next key resistance level of note, and a sustainable return to this level would mark a reversal of the 50 plus basis point sell-off seen between September and October. And there's also been a tone change as it relates to the outlook for long-end treasury issuance during that period. But while the market appears biased for the next change to long-end auction sizes to be a decrease, the Treasury Department has not clearly signaled a directional bias for issuance further out the curve. Nor has the question been settled by T-Back, whose most recent letter to the Treasury Secretary said there was considerable debate around the pace and sizing of changes to auction sizes in the long end of the curve. More specifically, the T-Back minutes said that members generally agreed that additional issuance should be concentrated in the 2-10-year sector and had a meaningful discussion about potential future changes to 20-year and 30-year issuance. And so after the refunding in our client survey, we asked investors to forecast the size of the November 2027 30-year refunding auction. For context, the November 2026 30-year new issue is set at a size of 25 billion. And in our survey, 24 billion was the median and mean response for the size of the November 2027 30-year auction, indicating a bias toward lower bond auction sizes next year as opposed to higher. More specifically, 52% of respondents expect the November 2027 long bond auction to be smaller than 25 billion. Meanwhile, 31% foresee no change from the current size and 17% see an increase from 25 billion. In other words, the market appears biased for flat to lower 30-year auction sizes in 2027, even though aggregate treasury issuance is expected to increase. So clearly, the mean expectations is for issuance to remain very bill-centric for the foreseeable future. Why don't we all just be average and not so mean all the time. In the week ahead, treasury market investors will receive an inflation update in the form of the October CPI release. Headline CPI is seeing increasing 3/10 of a percent in the month of October, and core CPI is seeing up a relatively benign 2/10 of a percent. Numbers that unto themselves wouldn't suggest that the fed should be hiking in December. However, the larger backdrop is that inflation has been above target for several years, and the fed is actively in the process of recalibrating policy rates higher to address this fact. The market also sees PPI on Friday, where the consensus is for a 4/10 of a percent gain in headline, and a 3/10 of a percent move in core. Wednesday is a market holiday, which means that the refunding auction schedule will be slightly interrupted. We have 3 years on Monday at 58 billion, followed by 42 billion 10 years on Tuesday, and then Thursday the 30 year auction occurs at 25 billion. There's a variety of fed speak on the horizon as well, including voters and non-voters, and we expect that any shift in the tone that needs to be communicated ahead of the December meeting, back conversation will be started over the course of the week ahead and the following week, setting the tone ahead of the Thanksgiving holiday. All of the incoming macroeconomic data could ultimately be overshadowed by price action in the equity market, and/or any developments in the Middle East and the repercussions for the energy sector. As it currently stands, there is the sense that the ramifications from the midterm elections have refocused the market on the potential for additional regulation, which should be interpreted as incrementally negative for risk assets. We've seen that in a price action, although stability does appear to be emerging at the moment. Assuming that further stability is the theme, then the market will likely continue to consolidate and be in a position to respond to the incoming inflation numbers. On the flip side, if we see the equity market weakness resume in the week ahead, the issue then becomes how significant is the move, and does it warrant a rethink on the part of monetary policy makers about any implied urgency to move next month, or should plans to add another quarter point to policy rates be delayed in South 2007? We continue to expect that barring a material correction in the equity market that the path of least resistance is to deliver at least another quarter point hike, if not too, over the course of the next several meetings. It is worth highlighting that there's strong seasonality in the realized inflation data. So even if the headwinds on the equity front suggests that a December or Santa pause is warranted, there's still a case to be made that in the beginning of next year, the Fed could resume tightening monetary policy. If nothing else, it is shaping up to be a relatively volatile holiday season in terms of price action and has liquidity tends to trend lower during the last couple months of the year, we're growing increasingly wary of disproportionate price action attributable to an unwillingness to stand in front of significant moves given the time of the year. We've reached the point in this week's episode where we'd like to offer our sincere thanks and condolences to anyone who has managed to make it this far. And as we end this, the 399th episode of Macro Horizons, we're looking forward to next week's quadrasonennial episode. It's a thing. Thanks for listening to Macro Horizons. Please visit us at bmocm.com/macro Horizons. As we aspire to keep our strategy effort as interactive as possible, we'd love to hear what you thought of today's episode. So please email me directly with any feedback at [email protected]. You can listen to this show and subscribe on Apple podcasts or your favorite podcast provider. This show and resources are supported by our team here at Bimo, including the FIC macro strategy group and Bimo's marketing team. This show has been produced and edited by Puddle Creative. The views expressed here are those of the participants and not those of Bimo capital markets, its affiliates, or subsidiaries. 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