Yields Up Stocks Down

MACRO FRAME

US activity remains resilient enough to prevent a disinflationary narrative, while fiscal stress has become increasingly evident in euro-area dynamics.

STOCK INDEX FUTURES

Equity index futures moved lower overnight as Brent moved back above $100 per barrel and the 30-year Treasury yield reached 5.72%, its highest level since 2002. The move underscores that an expected October Fed hold is not equivalent to easier financial conditions: long-end yields and energy prices remain elevated, while a December rate increase remains possible. The September Fed minutes will help clarify policymakers’ assessment of inflation persistence, but the immediate equity backdrop remains sensitive to oil and bond-market direction. Beneath record highs in the S&P 500 and Nasdaq, participation remains uneven. The equal-weight S&P 500 stands more than 5% below its record and the Russell 2000 more than 8% below its peak. Despite a 22.7% rise in the S&P since its March 30 low, 199 constituents have declined. Large technology companies have contributed enough index gains to offset that weakness, making headline performance an incomplete measure of broader corporate conditions. The divergence is not necessarily irrational: strong AI-related revenue and earnings expectations have so far outweighed the valuation pressure from higher yields. Analysts expect Q3 S&P 500 earnings to rise 30.6% year over year, led by energy and technology. However, that concentration leaves the market increasingly dependent on a relatively small group delivering strong results and guidance. The key question entering earnings season is whether profits can continue to offset the higher cost of capital, and whether that resilience broadens beyond the current leaders.

Watch point: Despite tech volatility, the earnings backdrop suggests bullishness, despite the advent of a new hiking cycle.

CURRENCIES

US DOLLAR: The USD index rose 0.64% to 102.47, as a rise in oil and global yields supported the currency ahead of the Fed’s meeting minutes today. The FX market remains focused on European fiscal stress, particularly in France, despite the recent repricing of an October rate hike for the Fed. Still, the market is priced for a rate hike in December, and Monday’s services report showed still-strong activity, strong domestic demand, and elevated input prices. That combination argues for a restrictive Fed and higher Treasury yields, which should keep the dollar support. Meanwhile, its role as a defensive currency amid the absence of an attractive large-currency alternative is also dollar positive. The euro, the traditional primary counterpart to the greenback, is weakened by France’s fiscal and political risks; today’s minutes are the key catalyst for dollar direction.

Watch point: While current fiscal, macro, and geopolitical factors favor the dollar, it is beginning to enter overbought territory and could be susceptible to a modest correction.

EURO: The euro fell 0.73% to $1.1178 as yields and oil moved higher in Europe. For the euro to fall beneath the $1.10 level, more Fed rate hikes would need to be priced in. The euro rallied sharply yesterday after presidential candidate Marine Le Pen raised her target for spending cuts to €140 billion ($158 billion) from €125 billion if she wins power in 2027. France’s divided parliament and approaching presidential election continue to cast doubt on the delivery of a credible deficit-reduction budget; French fiscal worries thus remain the key driver of euro weakness. Meanwhile, The calling of a snap election in Spain added to further pressure on the euro. French-German 10-year spreads recorded their largest weekly increase last week, and the 20-day rolling correlation between the spread and euro is at -0.94, reflecting almost a perfect negative correlation. Around every 10 bps of widening in the French-Germany 10-year spread is associated with a 0.4% fall in euro. Money markets have continued to reduce expectations of an October hike, now priced at just 25%, in-line with Fed pricing. However, markets are no longer fully priced for a rate hike before year-end.

Watch point: French sovereign stress will continue to be a dominant factor in price direction, however, the $1.10 level acts as a strong resistance level.

BRITISH POUND: Sterling fell 0.51% to $1.3207, but rose to a 16-month high against the euro.  Fed minutes and geopolitical news are set to be a dominant driver in price direction today given the quiet data calendar in the UK. The latest French episode favors sterling largely through relative euro weakness, not through a distinctly improved UK fundamental backdrop. This distinction leaves us to believe GBP can outperform EUR while still depreciating against USD. The UK’s discussion of pension reform and closer EU ties offers some modest support at the margin, but GBP’s broader direction will continue to depend on gilt-market stability, the Bank of England’s expected policy path, and the extent to which the dollar remains supported by elevated Treasury yields. Money markets have increased expectations of tightening over the next 12 months from 84 bps to 101 bps priced in this morning; markets see a 82% chance of a hike at the November meeting.

JAPANESE YEN: The yen slipped 0.11% to 158.28 yen per dollar. Policymaker Sato said in an interview overnight that she supports the idea of raising interest rates in several stages. Markets remain largely unconvinced of policy action from the BOJ even as the bank is expected to announce that underlying inflation has its 2% target. Mainly, the lack of conviction stems from the bank’s recent communications following its split decision to raise rates and the following summary of opinions, which provided little clarity on the timing of the next potential rate hike. However, the minutes did point to a board more favorable to raising rates once more. The greatest near-term upside risk for the currency remains market intervention. Markets are pricing roughly a 16% chance of a hike in October and see 19 bps of tightening by year-end.

Watch point: While markets are underwhelmed at the BOJ, a path for additional rate hikes looks to be  appears to be the primary scenario.

AUSTRALIAN DOLLAR: The Aussie fell 0.44% to $0.6951. It’s a quiet week of data for Australia, which will give markets more time to assess the rate outlook for the Reserve Bank of Australia and give geopolitical developments more room to determine price direction. Monthly inflation data came in just under forecasts and led markets to further reduce odds of a near-term rate hike. The trimmed mean measure of core inflation rose 0.2% in August, under forecasts of 0.3%, though the annual pace held at 3.6% for a third straight month. This follows the RBA’s decision to raise rates by 25 bps to 4.60% last week. RBA Governor Bullock said the board believed financial conditions were now tight but were unsure if that would be enough to bring inflation down. She also noted policy worked with a lag and the board wanted to see how the hikes already delivered would impact the economy, a signal markets took as a potential end to further tightening. Bullock referenced that inflation data will play the greatest role in determining where policy lands in the future.

Watch point: August’s hiring figures argue for a higher-for-longer stance, leading the focus to Q3’s inflation data.

TREASURY FUTURES

Yields moved higher overnight alongside a rise in oil prices. The 10-year yield rose to 5.35%, while the 30-year yield hit a 24-year high at 5.72%. The market is awaiting the release of the Fed’s meeting minutes later in the day for further insights into the Fed’s policy outlook. Treasuries have risen alongside European yields, though the moves are not entirely related as French fiscal stress has driven OATs to record spreads against its peers. Mainly for the US, the rise in yields represents a substantial repricing in Fed rates expectations and strong expectations for economic growth. Recent survey evidence has continued to support the idea that economic growth remains robust, which gives ample reason to expect yields will move modestly higher over the next couple of months following their rapid rise recently. ISM’s September PMI data for the services sector showed a slight slowdown in activity, but nonetheless reflected an expansion in activity and mounting price pressures. Real final sales to private domestic purchasers were revised to a robust 4.6% last week, suggesting underlying domestic demand was considerably stronger than the headline GDP figure alone implies. September’s jobs report reflected weaker hiring momentum, but its stable household-survey and wage details limit the case for an aggressive repricing in policy. Other labor data have shown no signs of a broad increase in layoffs. Applications for unemployment benefits have been hovering at 57-year lows amid robust corporate profit growth and resilient domestic demand.

Watch point: Inflation risk, fiscal and corporate supply, capital competition and term premium will be key factors in determining whether the yield curve maintains its recent flattening or falls into a bear steeping move.

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