US 10s
It’s tough to gauge exactly what the bond market is saying but US 10-year yields have risen 9 bps today and are trading at 4.10% from a low of 3.60% a month ago.
A portion of that — for sure — is pricing out a recession. A month ago, non-farm payrolls were deteriorating and there were signs of economic weakness creeping into the US like it has in most of the developed world.
However the Fed delivered a 50 basis point cut and that got the market thinking there is a Powell put and since then, the recession trade has been unwinding.
Is that all this is?
You could make a good argument that it is, in large part because stocks have rallied as yields have fallen. That reflects a stock market that’s more upbeat about economic growth prospects and a soft landing than worried about slightly higher long-dated borrowing costs.
I’m mostly on board with that thinking but I worry that if yields rise materially from here (above 4.25%?) then we may start to price in a re-acceleration of inflation, or at least worries about that. If we get a Congressional sweep from either party and the deficit spending to go with that, then I think it’s a real problem.
I also worry that real China economic stimulus could also spark a rally in commodities that re-writes the inflation equation for next year.
That said, I don’t think we’re there. Stocks are showing that inflation still isn’t a problem and that even if the Fed stops cutting rates at 3.50-4.00% that’s just more powder for cuts if/when the slowdown finally comes.
In the meantime, I’m also closely watching equities for signs that higher yields are weighing. There has been some of that today as the grind higher in yields has coincided with the reversal of 30 points in S&P 500 gains.
SPX daily
I’m also cognizant that stocks are pricing in a great deal of AI hype and that Nvidia is sitting just below the June high and threatening a double top.
There is also this, which isn’t quite screaming warning signs but another week or two like this and it will be, along with some more meme-stock rallies.