The 5% Yield Effect, Powell's Fed for Thought, Obesity Drugs: Shots for Kids? 10/20/23

SPEAKER_1 (0:00)

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David Faber (0:31)

Market insight and analysis. You're listening to the opening bell of CNBC's Squawk on the Street.

Carl Quintanilla (0:37)

Good Friday morning. Welcome to Squawk on the Street. I'm Carl Quintanilla with David Faber, Sara Eisen at Post 9 of the New York Stock Exchange. Cramer has the morning off. Pre-market is adding a bit to Thursday's losses, even with yields backing off a touch. 10-year yield below five. Powell speech seen by some as dovish, but we are going into a weekend of geopolitical uncertainty, VIX near 21 A roadmap begins with a watch on yields. 10-year does cross five for the first time in 16 years.

Stock's looking to pull back at the open.

David Faber (1:04)

Plus signs of a resilient consumer. Amex beats expectations. Record revenue for the sixth straight quarter.

And transports continue to be in focus. They're on pace for what would be the fifth straight weekly loss for that group. CSX reporting a mixed quarter on weaker rail demand. Mike Swift saying freight demand remains steady.

Carl Quintanilla (1:24)

Let's get to that tenure. Hitting five, as we said late yesterday, just hours after the Fed chair's remarks to the Economic Club of New York. This is what he had to say about bonds and rates.

Jerome Powell (1:36)

Are we seeing the longer run bonds? Are they increases in rates? Are we seeing those come through in financial conditions in a persistent way? And I think if you look at financial conditions indexes, the answer so far would be yes, you are.

Persistence, it will be a matter of just seeing with our own eyes, but certainly they're coming, if you look at financial conditions indexes, they're showing tightening, and it's a lot because of longer rates.

Carl Quintanilla (2:00)

He did say a few months of disinflationary data is just the beginning, Sara, of what's going to be needed, but what did you think of his discussion about term premium?

Sara Eisen (2:08)

Well, he mentioned it, and he said that that could be having an impact here on long-term rates. My takeaway on Powell was for the doves, they got what they wanted, right? He didn't make a strong or forceful case for raising rates again this year, but he did leave the door open for it. So for the hawks, he didn't manage to cap long-term bond yields. So there was a little bit of both, but I think overall the message was he's content to wait and see, like some of his colleagues on the Fed are.

But David did mention that if the data continue to come in strong, they're resolute on inflation, they're proceeding carefully, but that they would do what's necessary, i.e. have to tighten further if so warranted. I think it's interesting that with the overall takeaway in the probability of Fed hikes, December came down after the Fed share. So the whole wait and see message, I think resonated more with the market, but interestingly, then the 10-year yield went up past 5%. So is it Fed-driven, or is there other longer-term factors at work here, like deteriorating fiscal issues, potentially higher inflationary pictures? You know, the really interesting thing that's happening beyond the long-yields going higher is the un-inversion of the yield curve, and it's kind of happening for the wrong reason.

Usually, the yield curve un-inverts as the market gets more confident about the longer-term outlook for the economy. They sell the short-term rates, but that's not what's happening. It's not a bull steepener, it's a bear steepener, and it's the higher for longer, basically, getting seeped into the market's mind.

David Faber (3:42)

Well, you showed us some of the data yesterday in terms of Chinese purchases or lack thereof of US. Treasuries. We've talked so often about it when you talk about the fiscal side of it.

The fact that we have to continue to issue a great deal of supply both for this year and well into next year, and what that's doing. There's an argument to be made there. Listen, others will say, I'll talk to people, and they'll say, it's just technical. Not quite sure what that means.

I mean, a lot of market participants always just like to tell you things are technical or it's positioning.

Sara Eisen (4:08)

Right, well, the other thing that's happening, and I think we should mention, is QT is in full force. So they're drawing down the balance sheet, a trillion dollars down. It's still $8 trillion, so it's still a high balance sheet, but that also puts pressure on long-term rates. I think what's most remarkable, David, about this move that we're seeing, the sell-off in bonds, is it's happening during this geopolitical situation, where gold is now at the highest level in a few months, just under $2,000, where there's evidence of a dash for safety, where oil prices are elevated, and yet bonds are not acting like safety.