It's all about the bond yields
Investors are getting increasingly nervous as the 10-year yield has now reached a 16-year high.
The September stock slide has so far bled into the early days of October. Investors have been rattled by worries about surging long-term bond yields. The benchmark 10-Year US Treasury was hovering just below 4.75% Tuesday morning. That’s the highest level since August 2007.
The Dow was down 400 points Tuesday and is now slightly in the red for the year. The S&P 500 and Nasdaq both tumbled as well Tuesday and the two indexes have shed 6% and 7% respectively in just the past month.
Rising interest rates could take some air out of the economy as well. Consumers may spend (and borrow) less. The housing market could cool. Businesses that already haven’t started to lay off workers may begin to do so, or at the very least, slow down their hiring plans.
This may or may not be the sign of an impending economic downturn. But make no mistake. Higher bond yields will have a deleterious impact on the economy and stock market. The question is whether or not the Federal Reserve will add to the pain by continuing to raise short-term rates. Investors are currently pricing in a 32% chance of a quarter-point hike in November with a small likelihood of another rate increase in December.
It wasn’t that long ago though that the market was expecting/hoping/praying that the Fed’s inflation fight was over and that the current rate hike pause would be permanent. Heck, some bulls had the delusional notion that the Fed could soon start to cut interest rates. Lower rates now seem to be more likely in the latter half of 2024, however.
With all this in mind, Wall Street will be eagerly awaiting the September jobs report on Friday.
I’ll have more to say about that later this week after we get the monthly ADP report on Wednesday and the latest jobless claims data on Thursday. But it goes without saying that if the labor market remains strong (187,000 jobs were added in August and wage growth rose at a still inflationary 4.3% year-over-year) then investors may freak out about the possibility of even more rate hikes. Still, a jobs number that is too weak could raise recession alarm bells…and that’s not something investors would likely want to hear higher. So traders will be wishing for a proverbial Goldilocks not too hot/not too cold set of numbers.