This is The Takeaway from today’s Morning Brief, which you can sign up to receive in your inbox every morning along with:
Treasury yields haven’t been too problematic for the equity market lately — until yesterday.
That was when the 10-year yield touched its highest point thus far in 2024, sending stocks tumbling.
Recent economic data may have given fuel to the higher-for-longer rates crowd: PCE data last week showed inflation slowing to some extent, but manufacturing numbers out Monday showed expansion in activity — and in prices. And the job market isn’t slowing meaningfully, at least as reflected by the JOLTS report Tuesday.
But that data isn’t breaking news, so to speak. Rather than changing the narrative that rate cuts will happen later than initially expected, it just augmented it.
And amid that narrative, stocks have been resilient. This year, the S&P 500 has hit 22 new closing records, rising about 9%, even with yesterday’s pullback. The index has fallen by at least 1% on only three occasions. Compare that with 13 at least one-baggers for the same period in 2023.
So what really changed Tuesday?
Perhaps nothing much.
The VIX index of volatility got some attention for a spike, but it only climbed to around 15 — still pretty wan by historical standards. Yes, the 10-year yield had a big upward move — but it has still only reached its highest level since late November. And the S&P 500 didn’t even end up falling by that 1% threshold.
Liz Ann Sonders, Charles Schwab chief investment strategist, had a good reminder when she spoke with Yahoo Finance in an interview: “It depends on the ‘why’ in terms of what the Fed is doing.”
Put another way, “Because potential output is growing more than usual due to strong labor supply and healthy productivity, the speed limit for non-inflationary growth is higher than normal,” Evercore ISI vice chair Krishna Guha wrote in a note to clients. “In these conditions, absent an insane boom, indicators of tightness matter more for the rates outlook than indicators of strength. These indicators, including today’s JOLTS, are thus far showing no signs of renewed tightening. As long as that remains the case, strong activity — and strong payrolls — do not represent a threat to the inflation outlook.”
Friday’s March jobs report will likely be the next catalyst for a potential sell-off if the data comes in stronger than expected. If these strategists are right, it might be temporary and/or unjustified.
And a reminder, straight from the Fed chair’s mouth at the last press conference: “In and of itself, strong job growth is not a reason, you know, for us to be concerned about inflation.”
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