Market participants still trying to get their heads around this “higher for longer” interest rate business the Fed has been talking about for a year and a half are what’s currently working over markets at the present time. It’s almost as if people have been suddenly slapped awake by this reality, even as its been hiding in plain sight and talked about openly by Fed Chair Jerome Powell and others.
Nothing else quite explains the mid-day swoon in today’s market activity, that saw lows of the day down anywhere from -1.00% (on the Dow) to -2.7% (on the small-cap Russell 2000) at a quarter past 2pm ET. Since then we’ve caught something of a wind back up, though the Dow still closed -173 points, 0.51%, with the S&P 500 and Nasdaq down -0.62% and -0.63%, respectively. The Russell finished -2.26% lower on the day.
It’s the bond yield reality settling in that helps adhere today’s narrative to Fed interest rate levels. We don’t even get a new Federal Open Market Committee (FOMC) meeting until Halloween, yet somehow it’s leading the current trading narrative. This is especially true when we see the small-cap Russell lagging the other indices — it’s the riskiest of stock markets, and thus the first to feel the pull-back when we see 2-year and 10-year bond yields at 5.07% and 4.71%, respectively. The last time we saw these levels was a week and a half ago, when equities skidded hard most recently, particularly on the Russell.
Recession concerns are also a part of this makeup. Even though more analysts are daring to step out and say a soft landing is more possible than they’d previously believed, there’s still the feeling of another shoe waiting to drop. Currently, projections are — from investors, not the Fed — that come the summer of 2024, we’ll see the first of the interest rate cuts, perhaps by as much as 50 basis points. But the only way that happens is either wishful thinking… or a downturn in the economy.
By the way, it’s simply not in the empirical evidence to suggest that the Fed would have raised interest rates 525 bps in a year and a half without causing any real economic pain. Yet the job market remains riddlingly impressive, as this morning’s Jobless Claims once again bear out. And CPI data from September, while somewhat warmer than we’d have preferred, is actually an indication the economy is strengthening, not weakening. Finally, because this economy has not yet fully exited the foothills of an extraordinary global pandemic, we may find less use for empirical evidence than normal.
The fear of the unknown is often the hardest to shake. And after a week of catching a bid on equities, what we saw today might be mere profit-taking and nothing else. But the evidence is there, in a bond market with yields way up from where they were just a few years ago and now approaching all-time highs on the 10-year (the 2-year has been higher a handful of times going back to the late 1980s), that equities are now facing formidable competition from these guaranteed asset classes.
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Bond Markets Keep Pressure on Equities
Market participants still trying to get their heads around this “higher for longer” interest rate business the Fed has been talking about for a year and a half are what’s currently working over markets at the present time. It’s almost as if people have been suddenly slapped awake by this reality, even as its been hiding in plain sight and talked about openly by Fed Chair Jerome Powell and others.
Nothing else quite explains the mid-day swoon in today’s market activity, that saw lows of the day down anywhere from -1.00% (on the Dow) to -2.7% (on the small-cap Russell 2000) at a quarter past 2pm ET. Since then we’ve caught something of a wind back up, though the Dow still closed -173 points, 0.51%, with the S&P 500 and Nasdaq down -0.62% and -0.63%, respectively. The Russell finished -2.26% lower on the day.
It’s the bond yield reality settling in that helps adhere today’s narrative to Fed interest rate levels. We don’t even get a new Federal Open Market Committee (FOMC) meeting until Halloween, yet somehow it’s leading the current trading narrative. This is especially true when we see the small-cap Russell lagging the other indices — it’s the riskiest of stock markets, and thus the first to feel the pull-back when we see 2-year and 10-year bond yields at 5.07% and 4.71%, respectively. The last time we saw these levels was a week and a half ago, when equities skidded hard most recently, particularly on the Russell.
Recession concerns are also a part of this makeup. Even though more analysts are daring to step out and say a soft landing is more possible than they’d previously believed, there’s still the feeling of another shoe waiting to drop. Currently, projections are — from investors, not the Fed — that come the summer of 2024, we’ll see the first of the interest rate cuts, perhaps by as much as 50 basis points. But the only way that happens is either wishful thinking… or a downturn in the economy.
By the way, it’s simply not in the empirical evidence to suggest that the Fed would have raised interest rates 525 bps in a year and a half without causing any real economic pain. Yet the job market remains riddlingly impressive, as this morning’s Jobless Claims once again bear out. And CPI data from September, while somewhat warmer than we’d have preferred, is actually an indication the economy is strengthening, not weakening. Finally, because this economy has not yet fully exited the foothills of an extraordinary global pandemic, we may find less use for empirical evidence than normal.
The fear of the unknown is often the hardest to shake. And after a week of catching a bid on equities, what we saw today might be mere profit-taking and nothing else. But the evidence is there, in a bond market with yields way up from where they were just a few years ago and now approaching all-time highs on the 10-year (the 2-year has been higher a handful of times going back to the late 1980s), that equities are now facing formidable competition from these guaranteed asset classes.
Questions or comments about this article and/or author? Click here>>