BNY Mellon Capital Market – Weekly Market Commentary

With volatilities collapsing for asset classes around the world, the market is looking for a
catalyst to define the fourth quarter. Given the all encompassing influence of
central bank liquidity, the FOMC meeting had the potential to provide that needed
jolt. In a slightly more hawkish than expected statement, the Fed has kept a
December taper on the table by not saying it was off the table. Consensus,
nevertheless, likely remains in the March 2014 timeframe, with the slight
hiccup from this week’s meeting weeding out the June 2014 or later crowd.

For our part, we still favor an earlier taper, possibly in January, based mostly on the premise that the Fed wants to taper. The recent spate of weak data, particularly on the
employment front, supports the view that the effectiveness of QE is waning,
which we think is a primary motivation in the Fed tapering discussion.
Complicating any timetable is the impact that the government shutdown will have
on incoming data, with the delayed September numbers now giving way to noisy
October figures. Next week’s employment report will be a prime example, with
the establishment and household surveys possibly taking different approaches on
how to characterize a furloughed government employee that, nevertheless, was
paid. For the moment, we remain range bound with the 10-year remaining on
either side of 2.5% with a 10 bps trading range. Risk assets have continued to
grind tighter, although we see little room for further gains in IG as the index
approaches +130 bps. High yield has outperformed recently, pushing below 5.7%
for the first time since May. We think that credit risk remains preferable to
duration risk, with a greater reach for yield into the single-B and triple-C
range. New issuance remains strong even as earnings season pushes through its
last large week of reports next week. Earnings trends are positive relative to
y/y and sequential data, although lowered expectations take the sheen of these