RECORD GROWTH AND TREASURY YIELDS

Did record third quarter growth impact yesterday’s seven-year Treasury auction?  In my view the lack luster demand, defined by the weakest demand for bonds by a two standard deviation margin, was significant.  Was the unexpected weak demand the result of the data or the result of the massive need for funds, a need amplified by the most dovish Fed in history that will permit above average inflation for a period of time, neither parameter is yet to be defined.

Treasuries trade upon future inflationary expectations and expected demand for funds.

Commenting about third quarter GDP, the economy bounced back by a record 33.1%, slightly beating consensus.  All aspects of the report exceeded expectations.  The question at hand is the growth sustainable.

To date it appears that it is, defined as growing around a 5% pace.  However, the rate of growth will be dependent upon potential COVID shutdowns.  The election will have an impact but that impact will not be known or felt in the immediacy.

As noted many times, Biden has endorsed a major rewriting of socio economic and Constitutional norms, the result of the progressive arm of the Democratic party.  During the past 24 hours many of its progressive leaders are already declaring that if Biden wins, their demands must be met.

Will such demonstrative statements influence middle of the road voters who may not share the progressive zeal but also abhors the President’s mannerisms?

Enthusiasm is a force multiplier.  Which candidate’s supporters are more enthusiastic?

Commenting on yesterday’s market action, equities reversed about 2/3 of the previous day’s drop.  Late in the afternoon, Bank America opined if there is a contested election, the averages can slide as much as 20%.  The Bank further writes that “if either side refuses to accept the results, with the economy set for an uncertainty shock, with businesses delaying hiring and investments, the decline could be considerably more.”

After the close the four largest companies posted results.  Apple, the largest company in the world, and Amazon, the third largest, disappointed.  Facebook’s results were mixed and Google exceeded.  As evidenced by valuations, expectations were very lofty.  A fifth company, albeit not in the same league as the “Fab Four,” Twitter also disappointed and is down considerably this morning.

Last night the foreign markets were mixed.  London was up 0.05%, Paris up 0.60% and Frankfurt up 0.01%.  China was down 1.47%,  Japan down 1.52% and Hang Sang down 1.95%.

The Dow should open moderately lower on earnings, COVID and the election.  More analysts are now acknowledging the potential radical rewrite of the macro economic landscape and the societal impact if the Constitution is changed if Biden elected and if there is a Blue Wave, suggesting great uncertainty via greater taxes and regulations.  The 10-year is off 1/32 to  yield 0.83%.

 

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.