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Last year, as government bond yields rose, stocks largely rejected the move. Spin from the strategist: Yields are rising due to expected economic growth, so everything is copacetic. And with expectations that the Fed would cut interest rates, there was another reason to remain calm.
Investors are no longer resting where they are 10-year yield (^TNX) is worried. It is moving upwards towards 4.8%, touching the high since the end of 2023.
One of the reasons is that this time the growth is accompanied by data on the reacceleration of inflation, especially in this week’s report from the Institute for Supply Management, which states that the prices of services are rising.
Markets have already reduced expectations for further Fed rate cuts this year. Now, they may have to adjust those forecasts further, especially given that President-elect Trump’s fiscal policies are widely seen as potentially inflationary — a view on at the head of the minutes from the Fed meeting in December.
“My main fear is that the inflation genie has never been put back in the bottle after the Covid inflation spike,” Jurrien Timmer, director of global macro at Fidelity Investments, he said in an interview with Yahoo Finance. “If the economy really picks up without the inflation dragon being completely slain, we could see inflation, which is currently a high of two, go back to three and maybe three and a half or four. It’s not a prediction, but it’s a scenario that I think would prevent the Fed from cutting rates further.”
This, Timmer said, is not the scenario the market is moving towards right now.
There is debate over what level in the 10-year yield would be particularly problematic for stocks, with consensus around 5%. And the markets have already felt it: the less carefully observed ones The 20-year Treasury reached 5% this week.
Despite the returns, most Wall Street strategists (including Timmer) still expect the stock to rise this year.
Michael Arone, State Street Global Advisors’ chief investment strategist for its US SPDR Business, said earnings — not fiscal policy, not the Fed, not Trump — will determine where stocks go this year.
“From my perspective, I think investors are wrongly obsessed with how much we’re going to cut Fed rates this year,” Arone said. in the interview. “Earnings are growing and I think that should be the focus.”
