Bonds & Bullion Dumped, Dollar Jumps As Shutdown & Student-Loan Cliff Loom

As the final week of September (and Q3) begins, two large tail risks loom over the market (and economy): government shutdown and student-loan-payment resumption.

Both could trigger notable declines in GDP: Goldman estimates that a government-wide shutdown would reduce quarterly annualized growth by around 0.2pp for each week it lasts after accounting for modest private sector effects; and expect the resumption of student loan payments to subtract 0.5pp from quarterly annualized GDP growth.

And just to pile on, as growth could slow, inflation threats are re-asserting themselves (via commodities) and hurting sentiment optically and actually via soaring gasoline prices.

That stagflationary impulse is clearly evident in forecasts for next year…

Source: Bloomberg

Safe-haven cash demand ahead of the potential shutdown helped send the dollar higher – breaking out to its highest since Dec 2022. Today was the biggest jump in the dollar in 3 weeks, and is up 4 days in a row…

Source: Bloomberg

Bonds were sold with both hands and feet today with the long-end dramatically underperforming (30Y +13bps, 2Y +2bps)…

Source: Bloomberg

The 10Y Yield reached its highest since Oct 2007…

Source: Bloomberg

Smashing the yield curve (2s30s) dramatically steeper (less inverted) -now at its least-inverted since May…

Source: Bloomberg

And remember, the re-steepening is the bad part, as BofA CIO Michael Hartnett – the most vocal bear at Bank of America – made an important observation, pointing out that at a time when everyone is predicting a soft landing, the hard landing “tells” are lining up: yield curve steepening -110bps to -67bps, unemployment rate up 3.4% to 3.8%, personal savings rate up 3% to 4-5% YTD, and maybe most importantly, HY defaults are up 1.6% to 3.2%, credit card delinquencies are up by half, from 0.8% to 1.2%, while auto delinquencies are soaring, up 5.0% to 7.3%.

The dollar’s gains were gold’s losses as the precious metal tumbled back to last week’s lows…

Oil prices also lagged on the day with WTI back below $90…

Bitcoin tumbled back down to $26,000 and found support…

Source: Bloomberg

For a change, we end with stocks where ‘most shorted’ names fell for the 7th straight day (despite a good try for a squeeze early on…

Source: Bloomberg

And as we noted earlier, the last six weeks have seen the most intense ‘shorting’ by hedge funds since Sept-Oct 2022…

The market is very much in a negative gamma environment…

Source: SpotGamma

And while the negative gamma typically exaggerates the intraday moves, 0-DTE is battling that trend, with its mean-reverting tendency…

Source: SpotGamma

All of which saw equity markets’ early weakness (during the early European session) whipped back into positive territory as US opened, then oscillate in a narrow range for the rest of the day. The Dow was the laggard (around unch) while the rest of the majors managed modest gains…