The effect of rising yields could still be affecting U.S. equities.
According to Matt Phillips of the New York Times, rising bond yields could have a push and pull effect on the markets–rising yields portend to economic strength, but at the same time, the cost to borrow money could stymie growth as consumers face rising rates.
“On the one hand, a rise in yields reflects the strength of the economy,” said Phillips in an article. “At the end of Friday, after a report showed unemployment is at its lowest since 1969, the yield on the 10-year note–or what the United States government will pay to borrow money for a decade–was 3.23 percent. It hadn’t been that high since May 2011.
“But as rates rise, borrowing will also become more expensive for consumers and companies, potentially slowing growth. Higher rates also change the balance of risk and reward for investors in other markets. Reflecting this, stocks fell, with the Standard & Poor’s 500-stock index ending the week down more than 1 percent.”
Source: tradingeconomics.com
Last week, benchmark Treasury yields were on the move, propelled by a tailwind of positive jobs data as the Labor Department revealed that job growth in the month of September retreated to its lowest level in the past 12 months, but the unemployment rate fell to its lowest level in almost 50 years.
Furthermore, unemployment claims data fell the previous week to a 49-year low, pointing to sustained strength in the labor market. Claims for unemployment benefits fell to 207,000, besting the forecasted 213,000 by a Reuters poll of economists.
In addition, private payrolls grew stronger than expected in September with 230,000 positions added. The private payrolls total easily bested the 168,000 jobs added in August–more than the 185,000 expected by a survey of economists and the highest number of payrolls added since the 241,000 added in February.
Moreover, the U.S. services sector grew last month at its fastest pace based on data released by the Institute for Supply Management. The ISM non-manufacturing index ticked up to 61.6, which represents its highest level since 2008, beating out a poll of economists expecting the index to show 58 for the month of September.
While the markets are expecting third quarter profits to continue their strength from previous quarters, rising yields could be a concern as we head into profit reporting for 2019. Even more important to watch in yields is the velocity at which they are rising.
“When it comes to interest rates, it appears speed defines everything and last week’s 17 (basis point) jump in 10-year yields served as another reminder that speed can kill equity market rallies. We were also reminded of this in February after yields rose at nearly the same pace,” said Craig Johnson, chief market technician at Piper Jaffray. “However, at the risk of using ‘this time it’s different,’ the technical backdrop for rates appears much different when comparing the recent rise in yields to January.”
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