Yields surged and yield curve "disinverted": Bond yields continued to surge this month, triggered by indications from the Fed that interest rates would stay higher for longer. The yield on the 10-year U.S. Treasury almost reached 5% during intraday trading in mid-month, marking its highest level in 16 years. At the same time, yields on longer-term treasuries increased more than those on shorter-term ones - 30-year yields climbed 0.37% this month, reaching 5.07% at the end of the month, while two-year yields only rose by three basis points to 5.08%, leading to a less inverted yield curve. This "disinvert" process raises the question of whether the U.S. has successfully avoided a recession or if the recession is on the brink of beginning. Despite recent volatility in the bond market, we believe that yield levels are not yet overly elevated for the following reasons: 1) The current 10-year yields are still below the expected policy rate at the conclusion of this hiking cycle (10-year yields stood at 4.91% at the end of the month compared to the terminal rate of 5.45%) and 2) The fiscal landscape remains challenging with significantly wide budget deficits. The Treasury's projection of $2 trillion financing for fiscal year 2023 has prompted investors to question who will step up to purchase this considerable supply. 

Fed Policy: In his speech this month, Fed Chairman Powell reiterated a cautious approach and stated that the Fed was not in a rush for further rate hikes, confirming the unlikelihood of a hike at the November meeting. He also indicated that the increasing long-term yields are effectively restricting financial conditions and could, to some extent, substitute for tightening through rate hikes. However, in our view, unless long-term yields continue to surge significantly, the Fed is likely to hike one final time (possibly in December), given the surprising resilience of the U.S. economy and robust demand for labor. October has witnessed some upside economic data surprises reinforcing investor concerns that rates would stay "higher for longer." For instance, retail sales rose 0.7% in October, about twice what was expected by consensus. Business activity also improved in October, with the S&P Global's flash U.S. composite PMI registering at 51, reversing the anticipated downward trend. 

Q3 earnings results failed to boost equities: According to FactSet, as of October 27, out of the 49% of S&P 500 companies that have released their actual results, 78% have reported a positive EPS surprise, and 62% have announced positive revenue surprises. The blended YOY earnings growth for the S&P 500 stands at 2.7%. However, stock price reaction has been tilted to the downside, especially as investors digested mixed earnings reports from mega-caps such as Microsoft and Alphabet. We highlight that the expectation of an improvement in Q3 earnings might not have priced in still stagnant growth. While the consensus projects a 10% increase in S&P 500 earnings in the coming year, we are more cautious due to higher real rates, increasing cost of capital, and wage pressures arising from a tight labor market and a shrinking workforce.

As of 10/31/23. Data provided by Bloomberg, NorthCoast Asset Management, Federal Reserve History.