HJ Sims Market Commentary: Cracking the Code

by Gayl Mileszko

Some secret codes can be quickly cracked by Mensa kids or quantum computers, others take a lot longer and can prove so vexing that hackers give up and just go try to steal the magic decoder ring. Codes are, of course, absolutely critical to communication during times of war and, in modern military history, one that was never broken remains famous to this day. During World War II, Japanese cryptographers intercepted but were never able to decipher the messages sent by the U.S. Marine Navaho Code Talkers. The code was developed at Camp Elliott in San Diego in May 1942 by a small group of 29 Navajo men, some as young as 15, based on the complex, unwritten, verb-based Navaho (Diné) language. The Navajo word for “ant,” wo-la-chee, for example, was used to represent the letter “a” in English. The words for “iron” and “fish”, besh-lo, came to mean submarine. The initial code consisted of 211 vocabulary terms that would be memorized and used in all secret and confidential Marine and Navy communications. Over the course of the war, 421 men were trained to work the Code in pairs and the number of words used to protect operational plans increased to 411. These skilled Code Talkers served with all six Marine divisions in the Pacific and with Marine Raider and parachute units conveying hundreds of messages by telephone and radio. Thirteen died in battle.  Survivors were sworn to secrecy until 1968, when the mission was finally declassified, decades after the battles of Utah Beach, Guadalcanal, Tarawa, Peleliu, and Iwo Jima.


Although far from Window Rock, the Navajo Nation Capital, central bankers around the world have developed their own cryptic language that traders and investors struggle to decipher. Fedspeak references central tendency, gauges midpoints of an appropriate target range, projects truncated confidence intervals and describes plot diffusion indexes of risk weightings. Official code talkers aim to “counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy” and couch statements with phrases that provide plenty of cover for errors, such as “considerable uncertainty attends these projections,” and “the future path can be affected by myriad unforeseen developments and events.”

Global Rate Hikes So Far This Year: 243

There are more than 100 central banks and so far they have effected a combined 243 rate hikes this year, approximately one every trading day. This week, the central banks of England, Australia, Norway and India meet to try and tackle the inflation plaguing their countries. But all eyes will be on the U.S. Federal Reserve, its Open Market Committee statement and Chair Powell’s press conference on Wednesday. Financial markets have already adjusted for a fourth 75 basis point rate increase to 3.75% but are hungry for clues about December, February and beyond. Mortgage lenders, homebuyers, car dealers, credit card companies, banks, municipalities and everyone else wants to know: is there serious talk of a pause, deceleration or pivot? Powell will choose his words and message very carefully so as not to spur a major market rally or selloff – either one means instability and could impede ongoing efforts to curb prices. Policy missteps could trigger or exacerbate a recession, so the safer course would be to imply a slowdown depending on how the next two jobs and consumer price numbers come in. The Fed next meets to decide on rates and tightening on December 14.

Target Rate Probabilities

At this writing, the Fed’s target rate is in the range of 3.00% to 3.25%. On Wednesday, it will rise to 3.75% to 4.00%. Futures traders place even odds on a December hike of either 50 or 75 basis points, but by February the low end of the target rate is expected to be at 4.75%, rising to 5.00% in March and holding there until a 25 basis point cut in September followed by another 25 basis point reduction in December 2023. History shows that, in the past 16 Fed rate hike cycles since 1954, the average unemployment rate at the time of the last hike was 5.7%. The current rate is 3.5%, so either this cycle is an outlier or we should expect to see more significant job losses before any pivot.

October Recap and Early November Market Movers

Investors have other focal points around the Fed announcement this week. There are six Treasury auctions, earnings reports coming from about one third of the S&P companies, 39 economic reports including job openings, construction spending, manufacturing and the big October jobs report on Friday. As Election Day approaches, the campaign rhetoric heats up and undecided voters choose sides and help determine the composition of state houses, the next Congress, and the direction of domestic policy.  The war rages on in Ukraine and missiles are flying from North and South Korea. Traders and economists have their eye on a new development in the U.S. Treasury yield curve; they have seen the 2-year yield exceed that of the 10-year since July 5, but now the 3-month yield has risen above that of the 10-year for seven days.  At the close on October 31, the 3-month yield was 4.05%, the 2-year stood at 4.48%, the 10-year at 4.04% and the 30-year at 4.16%. During the month of October, Treasury yields rose between 21 basis points and 39 basis points across the curve.  The 10-year BAA corporate bond yield increased 43 basis points to 7.15%.  The Dow had its best October ever, soaring 14% to close at 32,732. The Russell 2000 gained nearly 11%, finishing at 1,846. The S&P 500 at 3,871 closed 8% higher, and the Nasdaq at 10,988 ended up almost 4%. The stock market’s VIX volatility index fell 18% while Treasury market volatility rose more than 4 percent.  Oil prices closed 9% higher at $86.53 a barrel, gold fell by $25 an ounce to $1,635, and Bitcoin at $20,375, gained 3.4%.

Tax-Exempts Outperform in October

In the tax-exempt market, the AAA general obligation bond benchmarks outperformed their taxable counterparts in October but endured higher yields and more losses. Munis have, in fact, posted gains in only two months this year: May and July. The top rated 2-year yield closed the month 9 basis points higher at 3.18%. The 10-year at 3.39% also rose 9 basis points. The 30-year at 4.12% finished 39 basis points above where it began the month at 3.77%. Yield buyers have not seen these levels since 2013 and, flush with cash from $24 billion of principal and interest paid out on November 1, are enticed by muni ETFs and individual bonds in the primary and secondary market. Muni ETFs took in a net of $5.46 billion of cash in October and have added $19.6 billion so far in 2022. The new issue market saw the lowest volume of any October since 2008 and municipal bond mutual funds were whacked with $15.8 billion more of net withdrawals, causing institutional bid-wanteds to hit a new post-pandemic high during the final week of the month with a daily average of $2.1 billion. Daily trading volume averaged $15.8 billion and the buy-to-sell ratio at 1.6 to 1 has favored purchasers all year long.

Attractive Muni Yields

Last week’s $9.1 billion municipal calendar included two charter school and one senior living financing. The California School Finance Authority issued $26.8 million of non-rated revenue bonds for Lighthouse Community Public Schools structured with 40-year term bonds priced at 6.50% to yield 6.64%. The Authority also sold $22.9 million of BBB-minus rated school facility revenue bonds for Green Dot Public Schools California that included 30-year term bonds priced at par to yield 5.75%. Wisconsin’s Public Finance Authority brought an $11.9 million non-rated financing for Galloway Ridge at Fearington in Pittsboro, North Carolina; the transaction had a single maturity in 2043 priced at par to yield 6.875%. This week’s $2.4 billion slate includes a $84.4 million BBB rated Camden County Improvement Authority school revenue bond issue for KIPP Cooper Norcross Academy.

Two months remain on the 2022 calendar, but 5 of those weeks are holiday- shortened. We at HJ Sims stand ready to help you finalize your year-end strategies and plan for 2023. Reach out to your representative this week and allow us to help you decipher the market codes and produce the outcome of more income for your portfolio.

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