The 10-year Treasury yield topped 4% early Monday and may be headed for its highest close since late July. After rallying on strong jobs data on Friday, the S&P 500 slipped as Wall Street continues to reassess the outlook for Federal Reserve rate cuts.
The September employment report, whose 254,000 boost to payrolls was nearly double the forecasts, not only relieved concerns that job growth might stall. It also hinted that those concerns may have been misguided. All of a sudden, the Fed's narrow, dovish consensus led by Chairman Jerome Powell is being second-guessed.
Fed Faces Pushback With CPI On Tap
After Friday's strong jobs report, "We are in the none-and-done camp for the rest of this year," market strategist Ed Yardeni wrote over the weekend. That means he supports no further rate cuts
"The economy continues to grow at a solid pace around 3.0% on a (year-over-year) basis. So there's no rush for the Fed to ease."
Apollo Global Management chief economist Torsten Slok wrote a weekend post titled "No Need for Fed Cuts," saying the economy was "still strong," thanks to strong spending on AI, defense and other government programs, and "very easy financial conditions."
"The bottom line remains that rates will stay higher for longer."
Former Treasury Secretary Lawrence Summers, who predicted inflation's surge in 2021, wrote on X that September jobs data shows that the Fed was wrong to go big with its first rate cut.
So far the repricing of the Fed rate-cut outlook has been taken pretty much in stride, but there's a chance that could change with release of the consumer price index for September on Thursday morning. "The major risk," wrote Swissquote Bank senior analyst Ipek Ozkardeskaya is "a stronger-than-expected figure that would bolster the idea that the Fed may have made a mistake." That would increase the chance of no rate cut at the Nov. 7 Fed meeting.
Wall Street expects the CPI to rise 0.1% on the month, lowering the 12-month headline inflation rate to 2.3% from 2.5%. The core CPI, excluding food and energy, is seen rising 0.2% from August and 3.2% from a year ago.
Broadcom, Cava Lead Five Stocks Near Buy Points
Federal Reserve Rate-Cut Outlook
Friday's market reaction boosted the S&P 500 to within a fraction of a record closing high. Meanwhile, the odds of another big Fed rate cut on Nov. 7 fell to zero from about 35%, according to CME Group's FedWatch page. The reaction continued early Monday, with odds that the Fed will skip a rate cut at the next meeting edging up to 14% from zero a week ago.
At the Sept. 18 Fed meeting, policymakers released interest rate and economic projections for this year, 2025 and 2026. Those projections penciled in a full percentage point in rate cuts by the end of 2024 and another one-point cut in 2025.
The projections assumed that the unemployment rate would average 4.4% in the fourth quarter of this year. That looks less likely after the jobless rate eased to 4.05% in September from 4.2% in August and 4.3% in July.
Still, markets see 87% odds that policymakers will cut the benchmark interest rate another 50 basis points over the year's final two Fed meetings, in line with projections. Further, markets still see nearly 60% odds of a full point worth of cuts in 2025, lowering the federal funds rate to a range of 3.25% to 3.5%.
At the moment, markets are indicating that Fed projections in September still look reasonable. Most of the repricing so far has come from the market backpedaling after getting ahead of the Fed.
10-Year Treasury Yield Vs. 2-Year Yield
On Monday, the 10-year Treasury yield rose four basis points to 4.02%, after jumping 23 basis points last week. The 10-year yield hasn't closed above 4% since July 31. Meanwhile, the two-year Treasury yield rose four basis points to 3.97%, briefly cresting 4%.
The gap between the 10-year Treasury yield and two-year yield has narrowed to four basis points after reaching 25 basis points two weeks ago, according to St. Louis Fed data. That narrowing of the spread is a negative for banks' net interest margins, since they borrow at short-term rates and lend at longer-term rates.
The 10-year Treasury yield is considered the world's most important market-based interest rate because it is used to set rates for auto loans and the 30-year mortgage. The 10-year yield also is used as the discount rate by analysts in formulating stock valuations and price targets.
The Fed has much greater influence over shorter-term Treasury yields, which move more in line with Fed rate expectations.
S&P 500
The S&P 500 slipped 0.35% in Monday morning stock market action. On Friday, the S&P 500 rose 0.9%, finishing just 0.2% below its Sept. 30 record closing high. The S&P 500 is up 20.6% for the year.
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