An engrossing week kept investors on their toes

• Ten-year Treasury yield concerns: increasing rates are impacting the financial world.
• Government funding developments: McCarthy secured funding with last-minute negotiations.
• Oil market fluctuations: prices plunged, recovered a little and plunged again.

It was a wild week in the stock markets. Positive news from China's manufacturing data and an averted U.S. government shutdown initially pushed stocks up, but those gains very quickly dwindled. The focus this week was on the 10-year Treasury yield. While central banks are nearing the end of their rate hike cycle, they're not just standing by: they're also tightening on the long end of the yield curve. Meanwhile, governments are financing record deficits with these longer-term bonds. This means that in the bond world, demand is decreasing while supply is increasing. Such dynamics introduce a lot of short-term volatility, not only for fixed income but for stocks as well. When long-term rates rise, stock valuations typically fall. The ultimate outcome of this bond shift remains to be seen, but it's certain to dominate discussions in the coming months.

This move in yields provoked a rapid de-inversion of the gap between the U.S. 10-year and 2-year Treasury yields, suggesting we could be headed towards a recession. Typically, an inversion of the curve signals a recession ahead, but the recession is imminent when the curve switches back to its normal state. Nevertheless, we still believe strong labour markets continue to provide support for a soft-landing scenario. You can learn more in this week’s Living Market podcast.

Economic data

The United States ISM Purchasing Managers’ Index (PMI) results (a leading indicator of manufacturing performance) exceeded expectations, showing declining manufacturing, but at a slower pace. The employment segment returned to a growth phase, reaching its highest point since November 2022 and beating expectations, however, this was seen as bad news for the direction of rates, instead of the good economic news it really is.

U.S. government funding

A last-minute deal was struck to ensure U.S. government funding until mid-November. The bill, supported by the U.S. House of Representatives and later ratified by the U.S. Senate and President Biden, did not include major spending cuts or border security measures. Despite no provision for Ukraine funding, the bill was mainly favoured by Democrats. However, the deal had no impact on the markets.

Oil market developments

Oil prices fluctuated throughout the week. After an initial increase, prices plummeted, with the price of a barrel as measured by the WTI (West Texas Intermediate) metric falling below US$83/bbl. This decline was steady and unrelated to any specific news events. Inventory data from the U.S. Energy Information Administration was ambivalent. OPEC+ (an organization of leading oil-producing companies) maintained its output policy, while Saudi Arabia and Russia reiterated their voluntary supply and export cuts. Oil supply remains tight, but as recession fears mount, people are starting to wonder if demand will be affected. We maintain our positive outlook on the price of oil.