In the last week markets have shown a pretty quick shift up. See below.
On the one hand, markets had seemed oversold, so the recent rally makes sense. I had expected the second half of the earnings season to improve, contributing to better market conditions. On the other hand, the markets are primarily rising from the recent drop in interest rates. You can see in the chart above how markets started rising as soon as the 10-year rate started falling from peak levels.
US government debt levels, and the need for it to issue more bonds, had been putting upward pressure on rates—that had already climbed from higher levels of growth and inflation. I don’t expect the pressure on interest rates to go higher to fully dissipate, but there were two recent events that lightened the load:
Weaker economic data. For example:
The recent manufacturing ISM data (which surveys more than 400 non-manufacturing firms' purchasing and supply executives on what they are seeing), came in weaker than expected at 46.7. Generally, anything below 50 is considered in contraction (above 50 is considered in growth mode).
The jobs report showed an increase of 150k jobs added last month. BUT the household survey, which estimates the change in the number of people employed vs the change in the number of new jobs (since many people have more than one) was negative at -348k. In addition, wage growth was about the same vs. increases over the last several months.
With weaker economic data, comes an expectation of weaker growth and that the Fed will no longer need to raise interest rates because inflation falls with less growth. We agree that the Fed will no longer raise rates.
The treasury announced they would borrow less for Q4 than they had estimated last quarter ($776b vs $852b). This latter point released some pressure in particular, because the main reason yields had been rising for the last month was thanks to the term premium—aka too much supply vs demand of long-term bonds.
Can this keep going? For now, I am enjoying the stock rally emanating from the falling 10-year yield. But as I’ve said recently, I don’t expect the market to make new highs in the near term (the last high was 4600 on the S&P 500). Eventually, the conversation will switch back to the slowing economy, coupled with an environment of stable but higher rates—and what that means for earnings next year (which are still expected to be too high IMO).