In recent months, the stock market has faced headwinds, including rising Treasury yields, soaring oil prices, and a strengthening dollar. However, a shift in these key factors has given the equity market a glimmer of hope. In this blog post, we will explore how the recent drop in Treasury yields is playing a pivotal role in the stock market’s current rebound attempt.
As of the latest data, the S&P 500 futures are up 12 points, trading 0.3% above fair value. The Nasdaq 100 futures have gained 67 points, a 0.5% increase above fair value, and the Dow Jones Industrial Average futures are up 69 points, trading 0.2% above fair value. While this might not be considered a robust rally, it represents a noteworthy change in sentiment compared to the losses experienced since the beginning of August.
Treasury Yields in Focus
One of the most significant factors contributing to this market rebound is the sudden drop in Treasury yields. In overnight trading, the 2-year note yield, 10-year note yield, and 30-year bond yield all experienced highs of 5.17%, 4.88%, and 5.01%, respectively. However, the surge in the 30-year bond yield appears to have been driven by technical factors, particularly an oversold position. Subsequently, yields retreated, with the 2-year note yield at 5.08%, the 10-year note yield at 4.73%, and the 30-year bond yield at 4.87%.
The weaker-than-expected ADP Employment Change Report for September played a role in easing the pressure on Treasury yields. The report estimated the addition of 89,000 jobs to private-sector payrolls in September, falling short of the consensus expectation of 150,000. This followed an upwardly revised figure of 180,000 jobs in August. Notably, small businesses added 95,000 jobs, medium establishments contributed 72,000 jobs, while large businesses shed 83,000 employees. However, it’s worth mentioning that job stayers saw a 5.9% year-over-year pay increase, marking the 12th consecutive month of slowing growth.
The leisure and hospitality industry played a significant role in job gains for September, adding 92,000 jobs. While this was interpreted by some as encouraging for the overall economic outlook, it’s essential to remember that this industry relies heavily on discretionary spending. Consequently, it may not be a definitive signal of strong demand.
While the market welcomed the ADP report, its focus is now shifting towards the September ISM Non-Manufacturing Index, which carries considerable market-moving potential. With a consensus expectation of 53.7% (down from the previous month’s 54.5%), this report will provide insights into the broader service sector’s performance and its impact on the economy.
Beyond economic indicators, other factors are on the market’s mind. Mortgage application demand has hit its lowest level since 1996, signaling potential challenges in the housing market. Additionally, KeyBanc Capital Markets’ decision to downgrade Apple (AAPL) and the unexpected removal of Kevin McCarthy (R-CA) as Speaker of the House have introduced a new layer of uncertainty.
The political uncertainty stemming from the House’s actions raises concerns about the ability to broker a deal to avert a government shutdown after November 17 when the current continuing resolution expires. While this may become a more significant issue in the future, the immediate rebound in the stock market seems to be driven by the allure of lower Treasury yields.
In conclusion, the stock market is currently experiencing a rebound, driven in large part by the drop in Treasury yields. This shift in sentiment is a response to several factors, including a weaker-than-expected jobs report and technical factors impacting bond yields. However, challenges such as political uncertainty and a slowing housing market remain on the horizon. As always, investors should stay vigilant and closely monitor these developments to make informed decisions in a dynamic market environment.
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