U.S. balance sheet a "ticking bomb" cranky bonds can't ignore

U.S. BALANCE SHEET A "TICKING BOMB" CRANKY BONDS CAN'T IGNORE (1330 EST/1830 GMT)

It would appear that the U.S. has a rapidly accelerating balance sheet problem.

According to Philip Palumbo, founder, CEO and chief investment officer at Palumbo Wealth Management, the U.S. has roughly $33 trillion in federal debt, at an average interest rate of roughly 3%, which generates around $1 trillion per year of interest cost.

And Palumbo adds that based on current conditions, the Congressional Budget Office (CBO) projects that the government deficit from 2024 through 2033 will average $2 trillion per year (meaning net U.S. debt will increase by $2 trillion per year).

"A trend of $2 trillion per year deficits as far as the eye can see is simply not sustainable. At some point, we can be sure it will end, we just can’t tell when that point arrives. Our analysis does not suggest that we have reached that limit, but the cranky bond market...makes it very clear that they are now carefully watching" writes Palumbo in a note.

As he sees it, there are a number of scenarios that could play out.

In one scenario, he says that the federal government learns to exercise fiscal restraint which would imply very slow, or even negative GDP growth.

In a second scenario, the bond market shuts the borrowing door and government responds with fiscal restraint. This is effectively the same outcome as above, but starting with a higher debt load, and therefore a more severe growth reduction.

The last option Palumbo sees is that the Fed circumvents the bond market and renews quantitative easing, which may well lead to much higher inflation.

The first two scenarios suggest a deflationary environment, so Palumbo says owning bonds would be advantageous. The third option suggests inflation, which he says would make bonds totally unappealing.

Palumbo's bottom line is that: "The debt the U.S. is accumulating represents a ticking bomb that will require some very hard decisions at some point in the future."

He adds that "one thing that we know for certain is that as the level of total debt grows faster, the fuse on this bomb gets shorter."

(Terence Gabriel)

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WHAT WE DIDN'T TALK ABOUT WHEN WE TALKED ABOUT FRIDAY'S JOBS REPORT (1235 EST/1735 GMT)

With slim pickings in the way of economic indicators on Monday, data geeks have little to do but sift through the ashes of Friday's "bad is good" employment report.

"Bad is good," because the labor market clearly weakened last month (bad), which is viewed as a solid sign that the Fed could be done hiking its policy rate (good).

So beyond the flashing lights of the midway, here are a few sideshows.

First, the average number of hours worked per week dipped back to 34.3 in October. It's not an alarming level - that was where things stood just before the COVID shutdown - but over the long view, it's fairly low.

Add to that the rising number of Americans working part-time - not by choice but because that's what they can get - the narrative of a softening labor market becomes that more plausible:

Next, the average duration of unemployment has ticked higher for four consecutive months, to 22.2 weeks.

Couple that with the upward trend in ongoing jobless claims - particularly a pronounced spike since mid-September - and it becomes clear that it's taking laid off/fired workers longer to find that replacement gig.

The most recent continuing jobless claims reading is well above the pre-pandemic "normal."

And even then, business surveys such as NFIB and ISM continue to point to a difficulty finding qualified labor.

Are we facing a growing skills gap?

Finally, while annual hourly wage growth behaved by cooling as expected, it appears that core CPI is cooling faster.

This is good news.

Because prior to September, core consumer prices had risen faster than wages for 21 months, resulting in negative "real wage growth" since December 2021.

At the same time, balances for revolving consumer credit - which includes credit cards - has surged.

Add that to the ever-dropping saving rate, and it would appear that the American consumer, who shoulders about 70% of the economy, was (and still could be) in danger of running out of rope.

Consumers, unlike governments, have credit limits.

Next week's CPI report will confirm whether real wage growth remained in positive territory last month, which will be good news, particularly with the holiday shopping season champing at the bit:

(Stephen Culp)

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ANALYSTS CUTTING Q4 EARNINGS ESTIMATES BY MORE THAN AVERAGE (1200 EST/1700 GMT)

As S&P 500 companies have been reporting strong results for the third quarter, analysts have been cutting earnings forecasts for the next earnings period - and by more than they usually do, Nicholas Colas, co-founder of DataTrek Research, wrote in a research note on Monday.

While estimates tend to weaken as companies give conservative forecasts, the EPS fourth-quarter forecast for the S&P 500 SPX is down 3.9% since Oct. 1.

Based on data from FactSet, that 3.9% cut "is, however, highly unusual," Colas wrote. "We are... running more than twice the long run average."

Among sectors, consumer staples, consumer discretionary, industrials, materials and healthcare have seen the biggest cuts in estimates for the fourth quarter. Conversely, forecasts for utilities, energy and technology have actually risen, he noted.

"The breadth of the industries seeing downward revisions suggests that analysts see a slowing in general economic activity this quarter," Colas wrote.

Colas said investors will want to "gravitate to sectors with earnings momentum," heading into year end, and he said it is reassuring to him that his firm's favorite, large cap tech, is seeing upward earnings estimate revisions.

Separately, based on LSEG estimates as of Friday, overall S&P 500 fourth-quarter earnings are expected to have increased 7% year-over-year, down from an Oct. 1 forecast for 11% growth.

With results in from more than 400 of the S&P 500 companies on the third quarter, earnings for that period now are estimated to have increased 5.7% year-over-year, up from an Oct. 1 estimate for 1.6% growth, per LSEG.

(Caroline Valetkevitch)

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BOFA URGES CAUTIOUS BUYING OF US BANKING STOCKS (1115 EST/1615 GMT)

U.S. banking stocks could see a bear market bounce in the coming months and investors should be selectively adding exposure to the industry, analysts at BofA Global Research wrote in a note.

The possibility of interest rates having peaked could ease most of the pain points banks have seen in recent months, like strained margins and unrealized losses in their bond portfolios, the brokerage said.

"We believe investors should selectively add exposure, especially if two conditions hold, peak interest rates behind and no 2024 U.S. recession," the analysts said, warning however that traders "should not get carried away."

The sector has been whipsawed by a banking crisis earlier this year and the Federal Reserve's fastest pace of policy tightening since the 1980s.

Rate hikes are typically good for banks, which can charge higher interest on loans. But hiking them too much could discourage customers from applying for loans, hurting banks.

Worries around exposure to commercial real estate (CRE) loans have also added to worries.

However, cheap valuations and comfort around earnings per share growth expectations for 2024 could help the stocks, BofA said.

(Niket Nishant)

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KEEPING THE MOMENTUM GOING (1023 EST/1523 GMT)

Major U.S. indexes are modestly higher on Monday morning, following a massive week for stocks that included the S&P 500's biggest weekly gain since November 2022.

Investors are watching where Treasury yields go from here, after the benchmark 10-year Treasury yield's US10Y big drop last week fueled risk sentiment. After breaching 5% in late October, the 10-year is last around 4.65% on Monday, up on the day.

Healthcare S5HLTH and tech S5INFT are among groups leading the way higher among S&P 500 SPX sectors, while real estate S5REAS is the biggest laggard. Third-quarter earnings reports remained in focus with Walt Disney DIS and Biogen BIIB among the companies set to post results this week.

Here is the morning snapshot:

(Lewis Krauskopf)

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BEAR MARKET RALLY OR START OF A NEW BULL RUN? (942 EST/1442 GMT)

The recent rally on Wall Street has left many wondering if this is the beginning of a sustained uptrend in the U.S. stock market.

As Treasury yields backed off from multi-year highs in recent days, the S&P 500 SPX, Nasdaq Composite IXIC and Dow Jones Industrial Average DJI indexes broke above their 200- and 50-day moving averages and just another nudge could push them above their 100-day moving averages.

However, Morgan Stanley's chief U.S. equity strategist Michael Wilson thinks the recent gains look more like a bear market rally rather than the start of a new bull run.

Last week's gains in U.S. stocks were mostly a function of the retreat in Treasury yields due to weaker-than-expected economic data and coupon issuance guidance as opposed to expectations that the Federal Reserve will cut interest rates earlier next year, Wilson and team said in a client note.

"Over the past 2 months, both earnings revisions breadth and performance breadth have deteriorated significantly. Until those factors reverse in a durable manner, we find it difficult to get more excited about a year end rally at the index level," they said.

Given the uncertain outlook, MS strategists recommend staying invested in defensive sectors such as healthcare and consumer staples as well as late-cycle cyclical stocks like industrials and energy.

(Sruthi Shankar)

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U.S. 10-YEAR TREASURY YIELD'S SIX-MONTH STREAK OF GAINS AT RISK (0900 EST/1400 GMT)

With early-November weakness, the U.S. 10-year Treasury yield's US10Y six-month streak of gains is now in jeopardy: