Wall Street Breakfast: Rates Are Rising

Sep. 20, 2022 7:20 AM ET64 Comments
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Rates are rising

The 10-year Treasury yield crossed 3.5% on Monday for the first time since 2011, while the rate on the 2-year Treasury rose overnight to a 15-year high of 3.97%. The deep inversion and bearish run in the bond market is spooking investors ahead of another monster rate hike by the Fed, which meets today for its September meeting. As long as inflation continues to surprise to the upside, the volatility will likely remain, with the central bank now clearly willing to bring down the price pressures at all costs.

Snapshot: Traders are pricing in an 80% chance that the Federal Open Market Committee will lift its overnight lending rate tomorrow by 75 basis points for a third time, according to CME's FedWatch Tool. That compares with a 20% probability of a more outsized, 100 basis-point rate increase in the wake of August's hotter-than-expected inflation reading. Other central banks are also taking notice, with Sweden's Riksbank hiking rates today by a full percentage point, to counter an environment that is "making it more difficult for both companies and households to plan their finances."

Volatility is also causing chaos in equity markets, with the major averages inching up Monday after an earlier selloff, to only fall again overnight. "All I care about is finding the silver lining window, but that window is getting much more narrow," noted Louis Navellier, chief investment officer of Navellier & Associates. "The Fed statement will be everything. We need a light at the end of the tunnel."

Bond strategies? While rising yields have crushed treasury-related ETFs, there are ways investors can exploit a rising-rate environment. Market participants that are betting on higher yields can invest in inverse ETFs that are designed to bet against bond prices and are active again in the premarket session. Four examples and their YTD prices include the ProShares Short 20+ Year Treasury ETF (NYSEARCA:TBF) +29%, ProShares UltraShort 20+ Year Treasury ETF (NYSEARCA:TBT) +65%, Direxion Daily 20+ Year Treasury Bear 3x Shares ETF (NYSEARCA:TMV) +102%, and the ProShares UltraPro Short 20+ Year Treasury (NYSEARCA:TTT) +103%. (4 comments)

Sanctions exemption

Satellite internet is the rage these days after T-Mobile (NASDAQ:TMUS) unveiled a partnership with Elon Musk's Starlink (STRLK) and Apple (NASDAQ:AAPL) teamed up for emergency services with provider Globalstar (NYSE:GSAT). While satellite technology has been around for more than two decades, service has historically been spotty and was held back by its high price tag. However, the frequencies are starting to change, as newer generation satellites cut down on latency, and bigger constellations rolled out in "low Earth orbit" bring down the prohibitive costs.

Battle for the sky: Services like Starlink are being hailed by the rural population and those living in remote areas, and it's now available on all seven continents - including Antarctica. Musk's mission statement for the company was even recently expanded by providing service to the Ukrainian military after Russia severed lines of communication and key infrastructure following its invasion in February. Similar discussions are now taking place as Iran gets hit by widespread protests - over the death of a woman in the custody of the country's morality police - and subsequent reports that the government once again restricted internet usage to control dissent.

"Starlink will ask for an exemption to Iranian sanctions in this regard," Musk responded over Twitter after a user asked if it was technically possible to provide the service to the Iranian people. "It could be a game changer for the future," @erfan_kasraie added in the tweet.

Go deeper: Musk hasn't provided further details on how things would work, but Iranian users would likely need Starlink antennas and modems to access the broadband service. In the meantime, SpaceX (SPACE) is looking to rapidly expand Starlink with a constellation of up to 42,000 satellites, and is heavily outpacing its rivals. Amazon's (NASDAQ:AMZN) Project Kuiper is mostly on paper and competitor OneWeb has only launched 218 satellites (compared to the 3,000 that are currently supporting the Starlink network). Other current competitors include HughesNet, which is owned by EchoStar (NASDAQ:SATS), as well as Viasat (NASDAQ:VSAT), which offer download speeds of 25-100 Mbps. (9 comments)

Supply snarls

Shares of Ford (F) slid 5% in premarket trading this morning after the automaker flagged higher supplier costs and parts shortages. The situation, which has been a trademark of the supply chain since the pandemic, will leave the automaker with more unfinished vehicles than it had expected. About 40,000 to 45,000 will remain in its inventory at the end of the quarter that cannot be delivered to auto dealerships.

Bigger picture: Ford expects to incur an extra $1B in costs during the quarter as a result of the supply chain costs, on top of a previous $3B it outlined in July that was due to inflationary pressures. The carmaker still reiterated its full-year guidance, projecting 2022 adjusted earnings before interest and taxes of $11.5B-$12.5B, while EBIT for Q3 was maintained in a range of $1.4B-$1.7B.

Executives will "provide more dimension about expectations for full-year performance" when Ford reports Q3 results on Oct. 26. The automaker's largest rival, General Motors (GM), also announced similar issues earlier this year, saying it was unable to deliver nearly 100,000 vehicles due to parts shortages of items like computer chips.

Commentary: The update is "evidence that auto parts shortages and supply-chain issues are still ongoing," said CFRA analyst Garrett Nelson. "Ironically, Ford may have become a victim of its own success in that its recent U.S. sales growth has outperformed peers by a wide margin," adding that its Q3 output "apparently wasn't able to keep pace with demand." (53 comments)

Strategic reserves

Crude sales from the U.S. Strategic Petroleum Reserve were only supposed to last through October, after the Biden administration authorized the release of 180M barrels - or 1M bpd over a six-month period - due to inflationary shocks from the war in Ukraine. Now, another 10M barrels of strategic stocks will be put on the market for delivery in November, adding to the recent bout of emergency sales to tame fuel prices. According to AAA, U.S. gasoline pump prices were averaging about $3.67 per gallon on Tuesday, down from a record of over $5.00 seen back in June, though the drop has been accompanied by recession fears, an aggressive Fed and heavy bearish sentiment.

What it means: The latest announcement will bring the total to 165M barrels out of the 180M barrels that Biden authorized in March to "help address the significant market supply disruption and lower energy costs for American families." Volumes in the Strategic Petroleum Reserve have subsequently dropped to just 434M barrels, marking their lowest level since 1984. At the start of the year, the SPR contained 593M barrels, and it reached its highest point in 2010, when emergency stocks reached 727M barrels.

"I think the market should be freaking out" about the end of SPR draws, said Phil Flynn, energy market analyst at the PRICE Futures Group. "I think when the releases end, it's going to have the impact of losing a major producer - it will really tighten supplies." He even believes it could add another $5 to $10 premium to WTI oil prices.

Some history: Washington has released oil from the SPR roughly two dozen times, but most of them have been on a small scale (around 1M barrels) and in the wake of local disasters or emergencies. Over the past year, however, the Biden administration has coordinated two big releases of 30M and 50M barrels, while the latest 180M was a third. Prior to these, a big drawdown from the SPR was a rare event, only coming after supply disruptions during the Libyan civil war in 2011 and Hurricane Katrina in 2005. (3 comments)

Today's Markets

In Asia, Japan +0.4%. Hong Kong +1.2%. China +0.2%. India +1%.
In Europe, at midday, London -0.2%. Paris -0.9%. Frankfurt -0.7%.
Futures at 6:30, Dow -0.3%. S&P -0.5%. Nasdaq -0.6%. Crude -0.2% to $85.22. Gold -0.2% to $1675.50. Bitcoin +4.1% to $19,221.
Ten-year Treasury Yield +5 bps to 3.54%

Today's Economic Calendar

FOMC meeting begins
8:30 Housing Starts and Permits
1:00 PM Results of $12B, 20-Year Bond Auction

Companies reporting earnings today »

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Bipartisan House bill seeks to up competition in payment card networks.

COVID-19 vaccine makers fall as Biden says the pandemic is over.

Analysts say Take-Two's (TTWO) 'GTA' leak doesn't mean catastrophe.

Uber (UBER) believes Lapsus$ may have been involved in data breach.

Nikola (NKLA) CEO testifies that company's founder misstated facts.

Amazon (AMZN) loses PillPack founders four years after acquisition.

Apple (AAPL) raising app store prices in Europe and Asia next month.

Beyond Meat (BYND) COO arrested, accused of biting man's nose.

This article was written by

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