Wild Market Swing Caps Off Volatile Week  

Treasurys rally as Fed officials signal eventual slowdown in hikes. Treasury yields fell across a steepening curve after a substantial early morning selloff, in which the 10-year yield eclipsed its 2008 high. The 10-year yield reached heights of ~4.34% before falling to 4.22% by market close, a near 12 bp intraday swing. An article written by Fed “insider” Nick Timiraos spurred the rally, as he suggested that the Fed is considering a more conservative rate hike in December. That sentiment was echoed in comments made by SF Fed President Mary Daly, who hinted the Fed is “considering” a step down to 25-50 bp rate hikes. As a result, the probability of a 75 bp hike in December fell significantly, the market now pricing in a near 50/50 chance of a 50 bp vs. 75 bp rate hike.  

Banks prepare for elevated credit stress in their auto loan portfolios as used car prices decline, but messaging remains positive. Major banks saw early signs of auto loan stress in Q3 as used car prices declined 7% in the quarter, the biggest dip since the global financial crisis. Wells Fargo saw higher loss rates for loans originated late last year, Ally Financial saw auto charge-offs quadruple in Q3, and Fifth Third Bancorp is scaling back originations. Some analysts are concerned that as car prices fall, borrowers who find themselves with loan balances greater than the value of their cars will stop paying and allow the cars to be repossessed. Still, bank executives have communicated confidence in their credit management practices and the soundness of new auto loan production.

Week ahead. Data reports will be plentiful, with the PCE price index, quarterly GDP growth rate, durable goods orders, and new home sales set to be released.