Wall Street is grappling with rapidly rising bond yields, pushing the 10-year U.S. Treasury to levels not seen since 2007. This surge, debated whether driven by stubborn inflation or robust economic growth, is creating unease among investors who fear a potential market correction. While tech stocks initially rally, concerns are mounting for consumers facing higher mortgage rates and stagnating wages, with critical economic reports on the horizon.
Wall Street is currently grappling with a significant surge in bond yields, sparking intense debate among investors about the underlying drivers. Whether it's persistent inflation, robust economic expansion, or the ballooning federal deficit, the consensus is that higher interest rates are here to stay, causing apprehension and fears of an impending market correction.
This week saw Treasury yields spike dramatically, with the benchmark 10-year U.S. Treasury note briefly touching 5.23%—a level not witnessed since June 2007. The 30-year Treasury yield also climbed to 5.53%, while the 2-year note yield briefly exceeded 4.90%.
One contributing factor this week was a series of strong economic surveys, particularly within the manufacturing sector. For some investors, these robust indicators confirm the enduring bull case for equities, suggesting that elevated yields are a natural response to an economy that, by several metrics, is running hot. This is especially true given the massive inflows of capital into artificial intelligence-related ventures.
Dennis DeBusschere of 22V Research commented on the situation, stating, “The economic restraint that the capital markets/Fed is providing will slow growth. Our call is that the growth slowdown will be gradual (toward 2% real), inflation risk will be lower and that is eventually positive for equities.”
Following this perspective, where vigorous economic growth, rather than inflation, is the primary force behind rising rates, investors are advised to align with the biggest beneficiaries of this strength: technology stocks. Market movements this week reflected this sentiment, as cyclical parts of the market experienced a downturn, while growth-oriented companies, including the Nasdaq Composite, the “Magnificent Seven,” and semiconductor firms, saw significant gains.
Despite the turmoil in the bond market, the S&P 500's resilience near all-time highs in September indicates strong market momentum, coinciding with what is historically the year's best quarter. However, these elevated market levels also introduce a heightened risk of a downturn, potentially a substantial one, particularly with the added pressure of an influential midterm election season.
Justin Bergner, a portfolio manager at Gabelli Funds, warned, “I continue to think that there's more risk to the downside than to the upside. Higher interest rates should reset asset prices lower to some degree.” He added, “And whether or not that's all you see in the market, or people conclude that the negative effects of interest rates far outweigh the signal they may be sending regarding, you know, AI productivity, I think, remains to be seen.”
These dynamics underscore the critical importance of upcoming inflation and economic reports, especially those for September, which will precede the Federal Reserve's October meeting. Next week's calendar includes the release of the Personal Consumption Expenditures (PCE) price index for August, followed by the September jobs report on Friday, which is expected to show nonfarm payrolls halving to approximately 85,000 from 162,000 in August, with the unemployment rate holding steady at 4.1%.
Consumers are now under increased scrutiny as they contend with bond yields at generational highs, following five years of soaring prices for gasoline, groceries, automobiles, and housing. Simultaneously, consumers are beginning to feel the pinch of stagnating wages and growing concerns about AI-driven job displacement. The average rate for a 30-year fixed mortgage this week surged to 7.45%, reaching its highest point in over two years, according to Mortgage News Daily.
“Consumers’ been holding in. How long can that last? That’s what worries me,” Bergner noted. “I don’t think, kind of, the business cycle is done because of AI. And at a certain point, that will begin to affect the megacap companies as well.”
Week Ahead Economic Calendar (All times ET):
- Monday, Sept. 28: No major releases.
- Tuesday, Sept. 29: 9:00 a.m. FHFA Home Price Index (July); 10:00 a.m. Consumer Confidence (September); 10:00 a.m. JOLTS Job Openings (August). Earnings: Carnival.
- Wednesday, Sept. 30: 8:15 a.m. ADP Employment Survey (September); 8:30 a.m. GDP Chain Price final (Q2); 8:30 a.m. Personal Consumption Expenditure Price Index (August); 8:30 a.m. Personal Income (August); 8:30 a.m. Wholesale Inventories preliminary (August); 9:45 a.m. Chicago PMI (September). Earnings: Micron Technology.
- Thursday, Oct. 1: 8:30 a.m. Initial Claims (09/26); 9:45 a.m. S&P Global PMI Manufacturing final (September); 10:00 a.m. Construction Spending (August); 10:00 a.m. ISM Manufacturing (September). Earnings: Nike, McCormick & Co.
- Friday, Oct. 2: 8:30 a.m. Hourly Earnings preliminary (September); 8:30 a.m. Average Workweek preliminary (September); 8:30 a.m. Manufacturing Payrolls (September); 8:30 a.m. Nonfarm Payrolls (September); 8:30 a.m. Private Nonfarm Payrolls (September); 8:30 a.m. Unemployment Rate (September); 10:00 a.m. Durable Orders final (August); 10:00 a.m. Factory Orders (August).
