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Last 12 months, as Treasury yields climbed, stocks mostly shrugged off the move. The spin from strategists: Yields are rising due to expected economic growth, so all the pieces’s copacetic. And with anticipation that rate cuts from the Fed were forthcoming, there was yet another excuse to stay calm.
Investors are not any longer chill where the 10-year yield (^TNX) is worried. It’s pushing up toward 4.7%, closing in on late-2023 highs.
One reason is that this time, the rise is accompanied by data showing that inflation is reaccelerating, notably on this week’s report from the Institute for Supply Management, which stated that prices paid for services were ticking up.
Markets have already slashed expectations for further Fed rate cuts this 12 months. Now they could must adjust those forecasts even further, especially provided that incoming President Trump’s fiscal policies are broadly seen as potentially inflationary — a sentiment on the forefront of the minutes from the Fed’s December meeting.
“My principal fear is that the inflation genie was never quite put back within the bottle after the Covid spike in inflation,” Jurrien Timmer, director of worldwide macro at Fidelity Investments, said in an interview with Yahoo Finance. “If the economy really accelerates without the inflation dragon having been completely slayed, we could see inflation, which is currently within the high twos, return into the threes and perhaps three and a half or 4. It isn’t a prediction, but that is a scenario that may, I feel, prevent the Fed from cutting rates further.”
This, said Timmer, is just not a scenario the market is pricing in right away.
There’s debate over what level within the 10-year yield can be especially problematic for stocks, with consensus coalescing around 5%. And markets have already gotten a taste of that: the less closely watched 20-year Treasury hit 5% this week.
Yields notwithstanding, most Wall Street strategists (Timmer included) still expect increases for equities this 12 months.
Michael Arone, State Street Global Advisors chief investment strategist for its US SPDR Business, said that earnings — not fiscal policy, not the Fed, and never Trump — will determine where stocks go this 12 months.
“From my perspective, I feel investors are wrongly obsessive about what number of Fed rate cuts we will get this 12 months,” Arone said in an interview. “Earnings are growing, and I feel that is where the main target needs to be.”