Market stopped believing in cheaper money | Weekend Intelligence #33

The past week had three main threads. The minutes from the Fed's last meeting reminded that the rate pivot came after years and the committee stood united behind it, while the labor market remains more resilient than expected. On Thursday, the AI trade hit a snag. And in Europe, mood is held back by French budget uncertainty, which weighs mainly on banks.

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Unanimous Fed and 197,000 claims: market pares rate-cut bets

The minutes from the FOMC meeting of September 15-16, released on October 7, showed that the quarter-point rate hike to the 3.75-4.00% range was supported by all committee members. It was the first hike in three years. A day later, data on new jobless claims arrived: a drop of 2,000 to 197,000 for the week ending October 3, versus 200,000 expected.

Unanimity in rate hikes is rarer than it seems - dissent tends to be a valuable signal for those betting on a pivot. Its absence deprived the market of the cheapest argument for rapid easing. The minutes also showed that most participants saw another hike by the end of 2026 as likely appropriate, though without consensus on timing.

The tone differs among individual voices. John Williams leans toward patience, Lorie Logan toward further tightening, and Governor Christopher Waller said on Thursday that more hikes will likely be needed to return inflation to two percent. Futures markets assigned about an 81% probability to a December hike.

Jobless claims measure layoffs, not hiring, and that is where their current signal is limited. They have held below 200,000 for a fourth straight week, and in mid-July they fell as low as 189,000.

Continuing claims, however, rose by 17,000 to 1.716 million: those who keep their jobs hold on to them, those who lose them search longer. Heather Long of Navy Federal Credit Union speaks of a market with low hiring and low layoffs.

The other side of the trade sits at the long end of the curve. The 30-year yield jumped 7 basis points to 5.447% on the day the minutes were released, the highest in 24 years, before solid demand in the $39 billion 10-year auction cooled it off.

The 10-year yield was around 5.23% on October 9, up 0.26 points from a month earlier and 1.19 points above its level a year ago.

The cost side of inflation is held up by the Middle East conflict, which drove diesel prices to record levels and lifted other commodities as well. Monetary policy can do nothing about such a shock - and at the same time it is the type of shock that makes central bankers tighten to prevent it from feeding into inflation expectations. A tight labor market makes that argument easier.

The coming weeks will be decided by the sequence of data before the December meeting: jobless claims, the pace of job creation, and core inflation.

If claims stay below 200,000 and continuing claims keep rising, the market will get a conflicting signal and the discount rate for long-duration assets will be driven by the 30-year yield, not by easing rhetoric. The first signal of a pivot would be dissent in the December vote.

PepsiCo cut core EPS growth to 1-2%: North America recovery drags on

PepsiCo reported third-quarter results on October 8 and simultaneously lowered its core EPS growth outlook in constant currency to 1 to 2% from 4 to 6%; including currency effects, to 2.5 to 3.5% from 5 to 7%. Revenue, meanwhile, grew: net revenue of $25.27 billion, up 5.6% year over year, above the FactSet consensus of around $24.95 billion.