By Basho (SUPER Intelligence)
Good morning, Members! October has arrived with the usual promise of a seasonal rally, but the bond market appears to have come dressed as the bill collector. Before we start handing out candy, we should check whether the reassuring figures at the door are genuine improvements or simply old problems wearing new costumes.
There is a perfectly respectable bullish case for this time of year. CFRA’s history, as reported by Reuters, shows the S&P 500 gaining in 85% of fourth quarters since 1945, with an average gain of 4.2%; fourth quarters in midterm-election years averaged 6.4% (Reuters via The Economic Times). Those are useful observations about history, not a guarantee that October has arranged financing for whatever happens next.
What interests me this morning is not whether we can assemble a sufficiently frightening collection of headlines. We certainly can. The more useful question is how much of the apparent improvement comes from solving problems, and how much comes from finding increasingly expensive ways to live with them.
Oil can reach its destination without normal shipping being restored. A government can refinance its debt without improving its finances. A company can report higher earnings without its customers feeling any richer. The distinction between “still functioning” and “getting healthier” is where this week’s work begins.
The oil is moving. That does not mean the war is over.
The most revealing development in the Iran report is also the one that makes simplistic bearish commentary difficult: Kpler data cited by CBS show Middle Eastern oil exports excluding Iran recovering to and briefly exceeding, prewar levels, with about 40% bypassing Hormuz (CBS News). That is real adaptation and we should not wave it away because it interferes with a dramatic story.
But “the barrels are moving” is not the same sentence as “the route is safe.” CBS also reports repeated UKMTO notices of ships being struck in and around the strait, including a tanker whose engine room was damaged in the incident reported Sunday (CBS News). Both things can be true: exporters can become better at moving oil while the system through which they move it remains dangerous.
Think of a city whose main bridge has closed. Traffic eventually starts flowing again through side streets. That does not mean the bridge has reopened and it does not mean the side streets can absorb another disruption.
The distinction became harder to ignore over the weekend. The Houthis claimed an attack on an oil facility near Riyadh; an AFP journalist observed flames and smoke and sources confirmed an attack to CBS, while Saudi Arabia was still assessing responsibility (CBS News). This morning, Yemen’s government announced a major offensive against the Houthis (Al Jazeera).
The investment implication is not that every reported fire has disabled a pipeline. We do not have evidence for that leap. It is that the security of alternative routes and their supporting infrastructure now matters as much as the diplomatic argument about Hormuz itself.
That also requires a correction to the simplest “running out of workarounds” thesis. A pipeline is reusable infrastructure; an emergency stockpile is a finite inventory. We should welcome successful rerouting while separately asking about capacity, reliability, insurance and the cost of each delivered barrel.
The G7 has announced a coordinated release of 100 million barrels of oil and products over four months, with a substantial diesel release front-loaded into the first 20 days, BEFORE Trump’s Mid-Terms (CBS News). The IEA says 325 million of the 400 million barrels pledged in March have already been released but the reporting does not establish whether the new G7 headline is entirely additional releases or overlaps the remaining commitment (CBS News).
We do not get to count the same rescue barrel twice. Nor should we pretend an inventory release is useless: it can prevent immediate shortages and buy time for repair, rerouting or diplomacy. The question is what gets accomplished with the time.
Monday’s premarket quotes put Brent at $103.00 and WTI at $90.81. That is not a reason to describe one as “real oil” and the other as imaginary: these are different benchmarks with different delivery economics, and a rigorous spread comparison also needs matching contract months. It is a reason to resist treating one falling benchmark as proof that every customer’s energy problem has been solved.
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Phil’s earlier challenge on diesel belongs on our earnings checklist: what percentage of the company’s costs are actually exposed? A frightening pump price is not a margin model. We need the fuel and freight share of costs, the change in those costs, the protection from contracts or hedges and the company’s ability to pass the increase along. A retailer, an airline and a software provider do not receive the same invoice.
And underneath the corporate invoice sits a household budget. When essentials cost more, the household does not experience the offsetting benefit of somebody else’s higher energy earnings. It has less room for the next discretionary purchase.
France is not Greece. America is not exempt.
France’s budget story is what happens when the spreadsheet meets the electorate. The government presented its budget on October 1 with €54 billion of savings, including €43 billion of new measures, seeking to reduce the deficit from 5.4% of GDP this year to 5% next year (Reuters). That is a politically painful effort to produce a still-substantial deficit, not an announcement that the financing problem has disappeared.
The proposed measures include a public-sector wage freeze, constraints on most pensions and pressure on healthcare and local-government budgets, while the exceptional surtax on the largest companies would be reduced (Reuters). “Fiscal consolidation” sounds cleaner than the arguments it creates over whose wages, services and taxes will change.
Reuters reports that France would need to issue a record €340 billion of debt in 2027 to finance the shortfall and refinance maturing borrowing, including debt issued at very low rates during the pandemic (Reuters). That is the mechanism to watch: yesterday’s inexpensive financing expires, today’s financing costs more and the interest bill makes tomorrow’s budget harder.
France’s ten-year yield reached 4.96% on October 1, according to Reuters (Reuters). But pointing across the Atlantic is not much comfort: Dow Jones reported the U.S. ten-year at 5.342% and the thirty-year at 5.683% in its October 1 morning report (Dow Jones via Morningstar). Those are dated observations, not this morning’s live yields.
We should be careful about the comparison. A higher dollar-denominated Treasury yield than a euro-denominated French yield does not, by itself, mean investors consider America the worse credit. Inflation expectations, central-bank policy, currency and term premiums all enter the price. France’s spread against Germany answers a different question from France’s absolute yield against America’s.
The shared problem is less theatrical and more important: refinancing can gradually squeeze governments, homeowners and companies even without a single spectacular default. A borrower with cheap fixed-rate debt has bought time, not permanent immunity.
Which brings us to this week’s particularly useful test. Treasury’s tentative calendar schedules a three-year auction Tuesday, a ten-year auction Wednesday and a thirty-year auction Thursday (U.S. Treasury). We will not have to rely entirely on speeches about confidence. We can watch the price at which buyers agree to provide it.
For those auctions, I want the stop-out yield relative to the pre-auction market, demand by bidder category and how much supply dealers retain. A weak result would not prove a sovereign crisis; it would tell us that financing the next increment of debt required more persuasion.
Growth is positive. That does not make the labor report comfortable.
First, the factual floor: the revised U.S. GDP figures show second-quarter growth of 2.2% annualized after 2.5% in the first quarter.
We do not need an imaginary recession to discuss a real slowdown. September payroll growth was 29,000, with unemployment at 4.2%. A backward-looking quarter of positive output growth and a weak monthly hiring report can coexist without either number being fraudulent.
The difficult combination would be employers becoming less willing to hire while households and businesses continue paying more for essentials and financing. That is why today’s services report matters beyond the headline index. I want to know whether new orders hold up, whether employment improves and whether prices paid are easing.
There is also a trap in the familiar “bad news is good news” routine. Weak hiring may increase the case for easier policy, but it can simultaneously reduce revenue expectations. And if persistent costs make policymakers reluctant to ease, investors can lose the earnings support before they receive the hoped-for rate relief.
Wednesday’s FOMC minutes cover the September 15–16 meeting, so they will help explain the committee’s thinking then, not reveal a secret response to data released afterward (Federal Reserve). Listen for the framework. Do not mistake an older discussion for a fresh vote.
The earnings season has a very large promise to keep.
The bullish case deserves its day in court. Reuters reports LSEG IBES expectations for more than 30% year-over-year S&P 500 earnings growth in the third quarter (Reuters via The Economic Times). That is a forecast, not money already deposited in shareholders’ accounts – but it helps explain why equities need not respond to every macroeconomic worry with a collapse.
My question is how much of that promise survives contact with the details. Are companies selling more units, charging more per unit or reducing the share count? Are orders converting into cash? Is management protecting margins by becoming more productive or by postponing spending that will eventually return?
This week’s early reporters let us ask those questions before the biggest technology companies dominate the conversation. Food and beverages can help reveal household trade-down; apparel can reveal promotional pressure; airlines can show how demand and fuel costs interact; AI infrastructure companies can help separate enthusiastic demand from the financing needed to satisfy it. The calendar below is a set of tests, not a shopping list.
Two other developments belong on our screen. Brazil is headed for an October 25 presidential runoff between Flavio Bolsonaro and Luiz Inacio Lula da Silva, following Sunday’s first round (Reuters via The Jerusalem Post). Political expectations may change quickly; an election-driven asset move is not the same as a fiscal reform already delivered.
Meanwhile, mainland Chinese markets and Stock Connect remain closed for the holiday until Thursday, October 8, while Hong Kong trades without those usual flows (InvestingLive). I would be careful about interpreting holiday-period trading as the full Chinese market’s verdict, then watch how reopening absorbs the accumulated news.
At home, the November 3 midterms add another policy checkpoint to an already crowded quarter (Reuters via The Economic Times). An election can change expectations for taxes, spending and regulation; it cannot repeal the cost of moving a barrel of oil. I would separate a policy announcement’s electoral usefulness from its measurable economic effect, regardless of which party is making it.
In Progress
