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Searing Yields Make Markets Sore to Touch

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It’s been a tough few trading sessions for eternal optimists. With a few wrinkles suggesting better times may be ahead, for the most part sentiment cannot get happy these days. Inflation versus recession, blah blah blah, nobody knows yet. The market can’t get with it with so many question marks in the way. The Nasdaq and small-cap Russell 2000 both posted positive closes today — +0.25% and +0.40%, respectively — but that’s more to do with how much these indices have been pummeled of late.

The Dow was -123 points, or -0.42%, while the S&P 500 came in tighter at -0.20%. Meanwhile, the 10-year Treasury bond yield reached its highest levels since April of 2010, and now sit ever-closer to 4%: +3.97%. The 2-year yield is +4.31%, keeping its inversion gap meaningfully wide from 10s. And UK Gilt bond yields, on the 30-year note, hit +5.04% for the first time in over 20 years — up more than a full percentage point over the past three sessions alone.

All of these events suggest the same thing: bond yields have become near-term destabilized. Investment in equities is actively being pulled and re-invested in guaranteed bond yields of sizable note these days, with rates headed higher. It has not been a mad rush out of the stock market — although sometimes it feels like it — but it has been one that yanked us down to 2022 lows in what we hope is a new floor.

Guess what? The Fed likes this. And this morning’s Case-Shiller Home Price Index -2.9% month over month, reversing the previous month’s +3.0? The Fed likes that, too. Even better (from the Fed’s point of view), today’s FHFA Home Price Index busted down -6.9% as opposed to the +1.3% previously. And both of these metrics are still tracing home pricing back in July — when interest rates were -1.5% lower than they are today.

The only data points the Fed sticks its nose up at today were in higher Consumer Confidence levels for September: 108.0 versus 103.2 in August, and higher than the 104.5 expected. Also, New Home Sales for August was way higher than anticipated: 685K new homes were sold in the month, up from 500K expected and an upwardly revised 532K for July. Perhaps this is the last big gust of homebuying activity ahead of the more dormant winter; if it isn’t, this will amount to an inflationary sticking point, and the Fed is going to want to wipe that out.

Right now, it appears the bet on the market overall is that the Fed is in the process of over-correcting its interest rate levels to control the economy, after months of waiting to get into the rate-hike (and balance-sheet-draining) game. If they’re right, then we’ll need to endure an undeniable recession (we’re currently still recession-agnostic, for the most part) before things return to “normal.” What we should therefore root for over the course of the next five weeks (before the next Fed meeting) is for more of these inflation-measuring reports to pull back notably.

Tomorrow is Advance Trade in Goods and Pending Home Sales — both for the month of August — as well as a slew of speaking engagements for Fed Presidents, including Bostic, Barkin, Evans and Governor Bowman and Fed Chair Powell. It’s too soon from last week’s meeting to expect any verbal sea-changes, though I’m sure if anything unexpectedly comes out tomorrow, we’ll be on the case.

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