☀️☕️ Soft Landing May Be Hard

📝 Focus

• Soft landing may be hard

📊 In the Markets

• One more, please, Robot Bartender

📖 MoneyFitt Explains

🎓️ Bond Prices DOWN, Bond Yields UP

📝 Focus

Soft landing may be hard

US central bank officials are still pretty unconcerned by the recent, dramatic increase in Treasury yields.

Rather than jeopardising a “soft landing” for the economy, many believe it could actually help in their epic battle to get inflation back down to their 2% target.

The Fed hinted last month during its “hawkish pause” (keeping benchmark interest rates at 5.25%-5.50%) at a likely quarter-percentage-point hike by year-end to combat inflation, and then staying above 5% through the end of next year.

In other words, interest rates would be “higher for longer”, as Fed Chair Jay Powell has been saying for over a year… with Fed officials still comfortable with their performance in guiding the US economy from dangerous inflation into a nice soft landing.

And yet…

..... ▷ The Fed has been raising interest rates rapidly since March 2022 and yet the labour market and economy has remained resilient, to the surprise of many.

One reason is that longer-term rates haven't risen by as much as the short-term rates more correlated with the Federal Funds rate that the Fed directly controls.

Bond investors have, at every step of the way up, been pricing in relatively soon and steep rate cuts, leading longer-term yields to drop below shorter-term ones last October (an “inverted yield curve.”)

Longer-term rates are the ones used for much of borrowing that actually matter for economic activity, like company borrowings, car loans and mortgages. (Low longer-term rates are also good for the stock market, especially growth names.)

But…

..... ▷ In the past two weeks, US 10-year Treasury bond yields surged by 0.5% to 4.8%, contributing to a huge 1% increase just since the end of June.

Several factors are driving this bond price collapse and hence the surge in yields🎓, including concerns about growing US budget deficits (leading to more supply), reduced foreign demand for Treasury securities, and even expectations of Japan's exit from ultra-loose monetary policies.

..... ▷ Long-term bonds have plummeted, with 10-year and 30-year Treasuries down by 46% and 53%, respectively, since their peaks in March 2020, sending yields shooting up.

This shift seems to reflect a belief that the disinflationary pressures from weak demand that the Federal Reserve has been battling ever since the 2007-09 global financial crisis have gone.

..... ▷ This rapid change has already resulted in higher borrowing costs for companies, pricier car loans for households and uneven deposit outflows from banks as investors and savers move funds into money market accounts.

And 30-year mortgage rates are nearing 8%, making homes even less affordable.

These hurt economic growth, raising the risk of stagflation and potentially affecting certain parts of the banking and non-bank system.

And high oil prices from OPEC+ production cuts and low inventories just add fuel to the fire.

..... ▷ The moves especially since June seem to mark a (belated) realisation by markets that the Fed is intent on keeping rates high, impacting businesses and consumers accustomed to ultra-low rates for 15 years, potentially leading to failed business models and unaffordable homes and cars.

Not so soft.

📊 In the Markets

China markets remained shut for the Golden Week. Domestic trading of stocks, bonds, and currency will resume next Tuesday, October 10, 2023. (But Shanghai Fashion Week starts Sunday!)

Other Asian markets rose on Thursday on the pullback in US Treasury yields, as did the Europeans, though the latter suffered some massive stock-specific losses.

Train manufacturer Alstom plunged 37% in Paris after warning about its free cash flow, while London-listed Metro Bank dropped by a quarter on reports it is trying to raise £600 million in debt and equity and selling £2.3bn of its £7.5bn mortgage book to raise funds.

Wall Street recovered from a weak day to close almost flat as bond yields dipped slightly and traders focused on Friday morning’s US jobs report (“Non-Farm Payrolls”). Investors are expecting 170,000 new jobs in September, slightly lower than August’s 187,000.

US labour market indicators are still all over the place. Tuesday’s JOLTS report showed: Hot. Wednesday’s ADP said: Not! Thursday’s initial claims for state unemployment benefits was: Hot again, which led to the early session sell off.

Labour market strength is a key indicator of the Federal Reserve's stance on future interest rate decisions.

Earlier in the week, a major sell-off in long-term US Treasury bonds had pushed yields🎓 to a succession of 16-year highs, but on Thursday, 10-year note eased to 4.72% from a peak of 4.88% the day before. (See Focus above.)

One more, please, Robot Bartender

Doosan Robotics, known for robots that make coffee and pour beer as well as jobs with humans like assembly, loading and welding, had a stellar Seoul market debut.

The shares surged from the open to peak 160% above the IPO price of 26,000 won before closing up a mere 98%.

..... ▷ Doosan Robotics specialises in collaborative robots (“cobots”) that work alongside real human beings and are used increasingly in cafes and bars.

This taps into a growing market driven by ageing and declining populations, labour shortages, rising labour costs and reshoring trends.

The global robot market is expected to grow at a 36% annual rate, reaching $2.16 billion by 2025 from $966 million in 2022.

The firm competes with Japan's 10x larger Fanuc and Denmark's SME cobot specialist Universal Robots.

..... ▷ The strong debut stands out amid recent IPO struggles worldwide, with strong investor demand as the institutional portion was oversubscribed 272 times.

The company was priced at the top of its 21,000 to 26,000 won range and raised $317 million in South Korea's largest IPO of the year.