“The stocks” are probably due for a breather.

US shares came into Jerome Powell’s speaking engagements this week riding their best streak of gains since 2021.

The seven-day rally pushed the S&P near 4,400, or 500 points above Mike Wilson’s year-end target, for those of you who contextualize the market and otherwise orient yourselves by way of Wilson’s forecasts.

The cumulative gain over that stretch is 6.4%, a nice bump to be sure.

You can thank, in no small part, relief at the long-end of the US Treasury curve. And you can thank Janet Yellen for that relief.

“Since the end of July, this thing has gone way up — almost a full percentage point,” Chris Waller exclaimed on Tuesday, marveling at a giant FRED chart during a Sesame Street-simple presentation to a handful of people in St. Louis.

“This thing” was the 10-year. “You can see [it] kinda popped up early in the year to about 4%, then it came down to about 3.5%, then it stayed down there –” Waller mused, describing the slide as if his audience had never seen a chart before. The crowd was encouraged to note the upward trajectory of the line they were staring at. “In central bank terms — in financial markets — that’s an earthquake,” Waller said. “For something to move 100bps in that short a period of time.

I’m not sure I’d call a 100bps move in nominal bond yields over three months an “earthquake,” exactly, but the driver of that move — the term premium repricing — most assuredly counted as a tremor. The sudden, 150bps ascent out of negative territory was a clarion call.

The market’s escalating compensation demands bear steepened the curve, creating uncomfortable optics given where we’re supposed to be in the cycle. Equities weren’t amused. Between higher yields, a stronger dollar and falling stocks, financial conditions tightened and Fed officials began to hint at skipping the final hike conveyed by the September dot plot.

None of this was lost on Yellen. She didn’t say it, but the decision last week to undershoot market expectations for coupon issuance was entirely down to the term premium repricing, and because the proximate cause of equities’ consternation was the bond selloff, the refunding was a game-changer.

“Supply is still building; that much hasn’t changed. It’s the way in which investors expect Yellen will access different sectors of the market that has taken away the bear steepening bias,” BMO’s Ian Lyngen and Ben Jeffery remarked.

The problem now is that with 10-year yields nearly 50bps from the highs and equities nearly 7% from the local lows, the Fed’s at risk of losing some the tightening impulse. Powell was adamant last week that market-based financial conditions only matter for monetary policy if any tightening is “persistent.” By openly talking about the FCI impulse from rising yields, the Fed helped negate that impulse.

Although Yellen’s tacit mix shift took the momentum out of the bear steepener, it was Fed rhetoric (about FCI tightening standing in for rate increases) which green-lighted markets to price out the final hike. When last week’s slate of top-tier US macro data came in soft (on balance), the situation escalated into a new “everything rally.”

Powell has a chance this week to push back on the market move, but I’m compelled to remind readers that he typically doesn’t lean against the price action until it’s “too late,” so to speak. There are multiple examples of Powell forgoing opportunities to short-circuit rallies, arguably to his own detriment.

Note that crude dropped below its 200-DMA for the first time in months despite geopolitical risk and OPEC+’s efforts to put a floor under the market. You could argue that soft prices in the face of supply curbs is a recession harbinger, but in the US context (i.e., in an economy that hasn’t exactly cooperated with efforts to slow things down), lower oil prices means more money to spend on other things. And the American consumer is incorrigible.

If the Fed was indeed pleased to see the market doing some of their remaining “dirty” work over the past three months, they might consider talking equities down a bit here. If Powell misses the opportunity, he could find himself playing Grinch at the December FOMC meeting.