US 10-year yields are back above 4%, rising 16 basis points today. That is the best instrument to tell the story of why US stocks started red hot and have quickly cooled.
It’s the combination of several things, starting with (1) strong US data today, including a great GDP report and low initial jobless claims. Powell yesterday pushed to keep the idea of a September rate hike alive and while that’s only risen to 22% from 20% today, there’s a plausible scenario where the US economy heats up.
Feeding into the inflation narrative is the (2) rise in WTI crude above $80 in a $1.27 climb today; grains have also been strong, sparking fears about food inflation. Falling energy prices are a big part of the y/y improvement in CPI but that could reverse as soon as September if oil stays high.
The final element (3) is uncertainty around the Bank of Japan and yield curve control. Last week, they leaked that nothing was likely to change and now there’s a report that they’re discussing removing the 0.5% cap in 10-year Japanese notes. I’ve had plenty of arguments with people who take both sides of what that would mean for broader bonds but there’s fear it could spark second round effects via carry trade unwinds that lead to bond selling globally, at least initially.
Some of this starts to create a feedback loop. US yields above 4% causes more selling in US equities and worry about inflation. Then you start to see an ugly candle forming on the SPX chart and more selling gets underway.
S&P 500 daily chart
Some of it is offset by a dovish ECB but even there, some might see that as a lack of vigilance on inflation.