Early this week, I suggested US equities might be disquieted by a backup in rates in the event yields rose too far, too fast.
The occasion was a double-digit basis point cheapening from the seven-year sector on out the curve catalyzed by the first expansion-territory ISM print since September of 2022.
The surprisingly robust read on US factory activity rekindled the “no landing” narrative, which is synonymous with a “good news is bad news” macro-market regime.
Fast forward to Tuesday, and stocks were wobbly again in the presence of more upward pressure on longer-end yields, which were cheaper by another four basis points (give or take) into the US afternoon.
As was the case on Monday, I’d caution against over-interpretation: It’s the beginning of a new quarter, and even if you can divine something from what counted as the second-largest two-day selloff in 10-year notes of 2024, it could reverse entirely by the end of the week depending on the balance of the labor market data.
But, in the event the US jobs report comes in hot, it’s possible this nascent, burgeoning bond selloff could snowball, dragging down equities which to this point had summarily dismissed a persistent, hawkish re-pricing of the Fed trajectory.
The figure below’s familiar, but it’s becoming more stark by the week.
At the extremes, markets were priced for six 2024 rate cuts plus some additional premium. Now, we’re down to two and a half quarter-point cuts (plus ~five basis points).
Strategists spent the better part of three months debating how sustainable the disconnect illustrated above will ultimately be. If the jobs report overshoots on Friday, and especially if a sturdy headline’s paired with a warm read on average hourly earnings, stocks’ll be at risk of a come-to-Jesus moment.
Although it’s certainly possible that an in-line NFP print and an innocuous AHE reading would be treated as non-events, a material overshoot on one without an offsetting undershoot on the other could prompt markets to price out the June FOMC meeting altogether.
If that were to happen (note the emphasis on “if” — this is purely hypothetical), it’s hard to see equities taking it completely in stride.
Another way to look at it – if one thought market pricing for six cuts was implausible, that created elevated expectations risk, and as market pricing for cuts declines, that risk declines. If market pricing moves all the way to no cuts, that may create expectations opportunity.