Its breakout week for longer-dated yields as we saw the 10-year note yield move comfortably above 3% and the 30-year bond yield moved to its highest level since May 17th of this year. Financial stocks made a huge move as the XLF (the Financial Select Sector SPDR ETF) jumped 2.5% in 2 days. It wasn’t just the U.S. moving either. The yields on Italy’s 10-year bond (the BTP) moved to 7-month highs and German 10-year yields (the Bund) moved to 3-month highs pushing up against that 50 basis point ceiling that has held for so long. All of this means the market thinks inflation may be coming, but in what form? Is it in higher wages pushing up demand or in tariffs pushing up prices to consumers?
One good, the other bad
If wages continue to rise sparking consumer demand and spending and prices go up based on this driver, then that is good news. The Fed may raise rates a few more times, but they would be raising rates because growth (here and globally) is so strong that it needs higher rates to head off demand-driven inflation. If the opposite side of the coin is the reality, then this is indeed trouble for the stock market. The Dow, S&P and the NASDAQ will correct harshly if wages fall or even stabilize and prices rise dramatically due to tariffs. The current level of tariffs is not affecting prices and even the additional 10% on $200 billion of Chinese goods or China’s retaliatory $60 billion in tariffs is enough to move the needle, but if this snowball continues to roll downhill, stocks could be in deep trouble.