• Dollar falls four out of five days to euro as 10-year Treasury drops 14.8bps to 4.655%
• Atlanta Fed GDPNow estimate for Q3 rose from 4.9% to 5.1%
• Treasury 3 -year auction sees lowest bit-to-cover since February; 2.50 v 2.75 prior
• Fed speak remains dovish; Waller refrains from commenting on near-term interest rate outlook

The dollar is declining and US stocks are rallying after a steady dose of dovish Fed speak has traders convinced rate hikes are over. Also providing a boost to sentiment is the report that China is considering more support for the economy, potentially raising its budget deficit this year.  Last week was all about an intensifying bond market selloff but that seems to be over following the surprise attack by Hamas on Israel.  The flight-to-safety into bonds is allowing Treasury yields to ease.  With the bond market fully reopened, it is clear that Wall Street is betting that the Fed is done.  A long-lasting bond market rally seems unlikely given major structural shifts of higher bond supply and on uncertainty with demand.

EUR/USD Daily Chart:

The latest round of Fed speak chopped down how high ‘higher for longer’ will be. This morning, Fed’s Bostic said, the policy rate is sufficiently restrictive to get inflation to 2%, “I don’t think we need to increase rates anymore.” Last week, Bostic already suggested a preference for holding rates steady for a long time.  The bond market rally remained in place as Fed’s Waller, one of hawks, reiterated the FEd will say on the job to acheieve price stability; refraining to comment on the near-term interest rate outlook.  Fed’s Perli said that their balance-sheet runoff has been running smoothly with “no significant” disruptions to markets. Eventually the plumbing of the financial system could trigger Fed action, but it doesn’t seem that is the case right now.

Yesterday, Fed’s Jefferson noted, ““I will remain cognizant of the tightening in financial conditions through higher bond yields and will keep that in mind as I assess the future path of policy.”  Fed’s Logan said, “If long-term interest rates remain elevated because of higher term premiums, there may be less need to raise the fed funds rate.”

Last Thursday, Fed’s Daly stated, “if financial conditions, which have tightened considerably in the past 90 days, remain tight, the need for us to take further action is diminished.”

It is clear traders are expecting another pause, but the risk of future hikes in 2024 remain on the table.  Parts of the economy are poised to accelerate here and financial conditions could still get a lot tighter.

Pepsico

Pepsi shares are higher after delivering strong EPS and organic revenue results alongside a small boost to their full-year Core EPS outlook. Pepsi’s results seem to be immune to the rush of new appetite-suppressing drugs. The consumer is clearly weakening and Pepsi is expecting an increasingly cautious consumer next year.

Management’s prepared remarks stated, “Consumer preferences have continued to evolve towards smaller packages that offer the benefits of convenience, variety, portion control, and good value and we have also taken decisive actions in certain categories and geographies to elevate our focus on selling profitable volume.”

Pepsi didn’t tell Wall Street anything new about the consumer, but some traders are surprised they were able to slightly raise their outlook. If this earnings season paints the picture of a very weak consumer,  Fed rate hike expectations will completely go away.

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