An aging Michael Corleone, in the third edition of "The Godfather" saga, vented the loss of his hard-won empire, and the guilt tied to the murders he had to commit while building it, in one of the trilogy's most iconic scenes.
"Just when I thought I was out .... they pull me back in!"
Stock investors had painstakingly constructed the longest rally on Wall Street in two years, powered by a sharp pullback in Treasury yields, only to see it snuffed out by yet another tantrum from the bond market. And those investors now are likely suffering from similar (although perhaps not as existential) angst right now.
Just when stocks thought they'd escaped the Treasury market's clutches — and could count on gains powered by earnings prospects and value propositions — they get pulled back into the morass of Federal Reserve rate policy, Treasury-refunding challenges, and the day-to-day whims of the world's biggest financial market.
Related: Wall Street braced for renewed bond market slump as Treasury debuts beefed-up auction plate
The warning signs for stocks were there
The warning signs were there, of course. Investors were told that a pivotal series of Treasury auctions this week could challenge the market's "peak rate" consensus.
But few were expecting the one-two punch stocks endured on Thursday, in the form of a horrid 30-year bond auction and a lecturing message from a hawkish Fed chairman.
Jerome Powell, speaking at an IMF-arranged event in Washington, appeared like a disappointed parent descending the stairs into a basement full of partying teenagers, insisting they turn down the music and put away whatever they're drinking in those red plastic cups.
Inflation hasn't been tamed, Powell said, and in fact markets have been tricked into believing that subdued consumer-price-index readings will lead to further easing of price pressures.
Because of that, he said, the Fed might have to raise rates again and wouldn't hesitate to do so irrespective of the market's overall complacency.
"Powell issued a warning to investors too giddy on the prospect of rate cuts next year, adding that the Fed will be true to its mandate and hike further should inflation reaccelerate," said Jeffrey Roach, chief economist for LPL Financial in Charlotte, N.C.
"The main reason markets are jittery is the chairman warned investors not to be misled by the 'head fakes' of a few good months of data," he added.
Related: Powell grabs punch bowl, tames Wall Street rally with hawkish rate comments
Slump at the Treasury's auction of 30-year bonds
Just as stocks were looking to test the longest rally on Wall Street since 1995, Powell seized the punch bowl less than an hour after investors watched the Treasury's $24 billion auction of new 30-year bonds disintegrate.
The sale, the third of three newly beefed-up auctions under the Treasury's new borrowing mandate, drew muted interest from both foreign and domestic investors. That forced the government to offer a sharply higher yield in compensation and dealers to hold onto a staggering 24.7% of the total offering.
That sets up stocks for a new fourth-quarter landscape: another possible rate hike, tighter financial conditions in the form of higher Treasury bond yields (which affect everything from corporate borrowing to mortgage rates), a deteriorating S&P 500 earnings forecast and a slowing global economy.
The crazy #volatility in US Treasuries continued today with a 15 basis point move up in yields for the 7-, 10-, 20- and 30-year #bonds (table below).
— Mohamed A. El-Erian (@elerianm) November 9, 2023
Per Bloomberg reporting from earlier (also below), this type of volatility is problematic for the functioning of a broad range of… pic.twitter.com/cdK1KxIWtq
Collective S&P 500 profits, which likely grew 5.7% over the third quarter to a share-weighted $483.6 billion, are expected to come in at around $465 billion for the three months ending in December.
Crude-oil prices, a good benchmark for global growth, are down for a third consecutive week and hovering near the lowest levels since July. That's even as the Israel-Hamas conflict continues, threatening to draw in Iran and raising concern about extended production cuts from OPEC allies Russia and Saudi Arabia.
Again, a U.S. government shutdown looms
Meanwhile, another government shutdown-showdown looms into next week as House Speaker Mike Johnson, the Republican lawmaker who emerged from the party's tax-and-spend squabble last month, faces a similar task that his predecessor failed to overcome.
That's not the greatest of news when the Treasury, which also saw limp demand for its $40 billion 10-year auction earlier this week, is attempting to entice foreign buyers – including China – to kick in some of the costs linked to the government's projected $2 trillion deficit.
Bank of America's closely tracked "Flow Show" report suggests all those concerns are piling up: Around $77 billion found its way into cash funds this week, putting it on pace for a record $1.4 trillion in new inflows this year, compared with $11.2 billion for bond funds and just $8.8 billion for stocks.
The bond inflow was the largest in four months but was concentrated mostly in longer maturities, suggesting that, at least prior to Powell's finger-wagging, investors were comfortable with peak-rate bets.
Related: Jobs report shows marked slowdown; jobless rate highest since January
Next week: Reports on retail and inflation
Next week's slate of releases, from inflation to retail sales, may go a long way toward confirming that thesis or discarding it completely.
The Commerce Department on Tuesday will publish October inflation data, with economists looking for the headline rate to hold at 4.1%.
Retail sales figures follow Wednesday, with analysts looking for a modest pullback in October spending amid a decline in gas prices and the rundown in postpandemic savings.
Super retailers Home Depot HD, Target TGT and Walmart WMT will report fiscal-third-quarter earnings, as well as critical holiday season outlooks, starting on Tuesday.
That sets up markets for a crucial end-of-year run, with gains powered either by promising consumer spending and hopes for an economic soft landing — no recession — or a pullback triggered by renewed inflation risks and a grumpy bond market.
As Hyman Roth noted in the second edition of the Godfather: "This is the business we've chosen."
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