US Market Recap: Equities Soar on Dovish Fed Talk, Treasuries Rally

'Equities: US equities ended in the green today amid a flurry of Fed speak that sent UST yields lower on bets that the Fed will likely keep rate hikes on hold. Key equity benchmarks rallied in the first half of the session but pulled back slightly into the close to end off best levels, with SPX +52bps to 4358, NDX +56bps to 15,131, and RTY +114bps to 1775. Today’s upbeat sentiment was largely driven by dovish commentary from Fed Bostic - 'I don’t think we need to increase rates anymore.' Furthermore, stabilizing oil prices after yesterday’s big rally added support to the market, with Brent ending -$0.44 at $87.71. Risk sentiment was also supported by positive news out of China, which is considering raising its budget deficit for 2023 as the government prepares to unleash a new round of stimulus. China ADRs (GSXUCADR) rallied 362bps today and was one of our top baskets. Short covering was also a driver of price action today, sending our Liquid Most Short basket (GSXUMSAL) +333bps. Lastly an EPS beat from PEP +2% helped lift positive sentiment around the consumer, with Cons Discr +109bps and Cons Stap +108bps outperforming among sectors today.

'Rates: Treasuries ended Tuesday richer by at least 12bps across the curve in a flight-to-quality rally sparked by developments on Monday when the cash market was closed for a holiday—supportive comments by Bostic today followed Monday’s signs of a dovish pivot from Vice Chair Jefferson and Dallas Fed President Lorie Logan. Demand was soft at the lower yields level for the monthly 3y note auction, which printed a 1.7bp tail, though market offered little reaction on the follow. US yields ended the session anywhere from 12-15bps richer across the curve with intermediate-led gains that saw 2s10s spread flatten 3.5bps on the day while 10y yields closed at ~4.65%, just 3bps off session lows. There was some interest to fade Monday’s rally with better selling of front-end and belly cash on our desk, though flows were otherwise muted.

'Credit: Macro credit is closing stronger today with CDX IG -1.1bps tighter and CDX HY +30cents higher in a compression. Index started out the day moving a touch wider before sharply coming tighter at the wides of the day in a strong bid for risk, especially as equities climbed higher. Rates continued to be a catalyst for activity as credit firmness followed in step with the rally in rates. Cash is also finishing stronger on the day, with IG noticeably -2.5-2.75bps tighter and HY +0.75pt higher. In IG, liquid single A 30yr risk remains the outperformer while the front end lagged a touch, flattening credit curves. CCCs had a strong bid for risk in HY while the intermediate part of the curve was also well bid. Primary markets saw some activity with $8.5bn having priced across three deals in IG and $1bn priced across one deal in HY.

'FX: The USD was broadly lower today as the move lower in yields after the holiday drove a risk-on tape. In G10, oil proxies CAD and NOK did not participate in the broad rally vs the Greenback, finishing within 10bps of yesterday's close as oil retraced some of yesterday's gains. Elsewhere, USDJPY was 15bps higher with yields marginally retracing some of their move lower throughout the session. Headlines overnight that the BoJ is mulling raising the FY23 inflation outlook to near 3% (vs 2.5% before) had a brief impact, however, with Gov Ueda previously noting that it is the FY24 targets which they need to have greater confidence in for policy to be adjusted, this is unlikely to change the BoJ's near term narrative. In EM, last week's underperformers ZAR, MXN and BRL all finished over 1.5% higher vs the USD, with outsized moves driven by positioning (much like last week) rather than any major idiosyncratic factors. Topical today has been the recent dovish Fed speak, and while this has had an impact on rates, GS FX Strategy note that the extent for this to continue is likely limited (and hence so is the impact on the USD), with officials needing to avoid unwinding this FCI move with inflation still above target / tight labour market.

'Tomorrow Brings: Tomorrow at 4:15am Fed Governor Bowman (FOMC voter) speaks and at 8:30am we have PPI final demand, Sep (GS +0.3%, consensus +0.3%, last +0.7%), PPI ex-food and energy, Sep (GS +0.2%, consensus +0.2%, last +0.2%), and PPI ex-food, energy, and trade, Sep (GS +0.2%, consensus +0.2%, last +0.3%). At 10:15am Fed Governor Waller (FOMC voter) speaks, at 12:15pm Atlanta Fed President Bostic (FOMC non-voter) speaks, at 2pm we have FOMC meeting minutes, September 19-20 meeting, and at 4:30pm Boston Fed President Collins (FOMC non-voter) speaks. In Europe, ECB's Lagarde and Panetta Speak and Riksbank's Bunge Speaks. Also, we have German HICP and ECB Consumer Expectation Survey Results, Aug. Overnight we have Taiwan Exports, Sep.'