Treasury yields spiked to multi-decade highs this week, pressuring cyclical stocks even as the Nasdaq and megacap tech names kept rallying. Investors now watch the September jobs report and inflation data for signs of whether the move higher in rates reflects an overheating economy or something more troubling.
The 10-year U.S. Treasury note yield briefly reached 5.23% this week, the highest level since June 2007. The 30-year Treasury yield touched 5.53%, while the 2-year note yield topped 4.90%.
Wall Street cannot agree on what is driving the surge — stubborn inflation, rapid growth or the exploding deficit. One catalyst was the release of strong economic surveys on Wednesday, especially in the manufacturing sector, which some investors read as confirmation that the bull case in equities remains intact. Dennis DeBusschere at 22V Research wrote that the economic restraint from capital markets and the Fed will slow growth, adding that the slowdown should be gradual and eventually positive for equities.
Tech extends its lead
The Dow Jones Industrial Average lagged this week, alongside financials and small caps. The Nasdaq Composite, the Magnificent Seven and semiconductors advanced over the same stretch. The S&P 500 remained near all-time highs in September, suggesting momentum is still on the market's side heading into what is historically the strongest quarter of the year.
Justin Bergner, portfolio manager at Gabelli Funds, said he sees more risk to the downside than the upside, arguing higher interest rates should reset asset prices lower to some degree. He added that whether investors conclude the negative effects of rates outweigh the signal they may send about AI productivity remains to be seen.
Consumers feel the squeeze
Consumers are coming into sharper focus now that they face bond yields at levels not seen in a generation, after years of higher gasoline, grocery, auto and housing prices. This week, the average rate on the 30-year fixed mortgage jumped to 7.45%, its highest in more than two years, according to Mortgage News Daily. According to CNBC, Bergner voiced concern about how long consumers can keep holding in: "Consumers' been holding in. How long can that last? That's what worries me".
The week ahead
Next week brings the release of the personal consumption expenditures price index for August. Friday brings the September jobs report, expected to show nonfarm payrolls roughly halving to 85,000 from 162,000 in August. The unemployment rate is expected to hold steady at 4.1%.
Source: CNBC
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