Is it a bird? Is it a plane? No, it’s the 10‑year Treasury

• Long-term rates and oil keep going up.
• Lots of macro data releases; little direction.
• Is a shutdown ahead?

U.S. stocks showed resilience amid significant momentum in Treasury bear-steepening (this is when long-term rates rise faster than short-term rates, causing a wider gap between the two). Long-end yields continued to increase, with the 10-year Treasury yield reaching new cycle peaks of 4.66% before slightly retreating, in what was a very volatile week for rates. There was no single catalyst for these shifts but rather a mosaic of data. U.S. macro highlights included a surprise low print of 0.1% in month-over-month inflation within a metric that the U.S. Federal Reserve (the Fed) particularly likes: the Personal Consumption Expenditures (PCE) deflator.

Markets appeared enthused on Friday morning by this news. However, a drop in both consumer confidence and new home sales blurred things a little. While the final Q2 headline GDP remained at 2.1% after revisions, there was a significant adjustment in consumer spending from 1.7% to 0.8%. This is particularly noteworthy given that consumer strength has been a key support for the economy. Durable goods orders exceeded expectations, yet there were consistent downward revisions, maintaining a muted overall trend. Secondary data points, such as the Chicago Fed National Activity Index and the Dallas Fed Manufacturing Index survey, also showed declines. On top of macro factors, month-end rebalancing flows (where portfolio managers habitually rebalance the asset allocation in their portfolios at the end of each month) may have also influenced the markets.

Meanwhile, Federal Reserve Bank of Chicago President Goolsbee remarked that the conversation would soon shift from the height of rate increases to their duration. We argue that this change has already happened. Federal Reserve Bank of Minneapolis  President Kashkari estimated a 60% probability of a soft economic landing, whereas the probability of the Fed needing to elevate rates significantly to counter inflation is at 40%. However, Goolsbee did mention that a government shutdown might change the Fed's course of action.

On this front, a notable development was House Speaker McCarthy's declaration to not allow a vote on the U.S. Senate's stopgap bill. Instead, a new bill will be voted on, which might face rejection in the U.S. Senate. The government may face a shutdown by October 1 if an agreement on a continuing resolution isn't reached, which could cause disruptions and unpaid furloughs for many federal workers. Shutdowns usually aren’t very long (the longest being Donald Trump’s 35 days), but even when they’re short, they have an impact on economic data, given the amount of people involved.

In China, sentiment weakened due to a missed bond payment by the problematic Evergrande (a Chinese property developer). This led to a sell-off in the Hong Kong index before a Friday rally softened the week a little. Volatility remains high in China overall, as markets eagerly await government intervention for support. So far, that hope has not paid off.

Lastly, oil prices achieved fresh yearly peaks. West Texas Intermediate reached US$94.90 per barrel before retreating slightly.

For more on our view on oil, listen to last week’s Living Market Podcast, which focused on this topic. This week, the impact of the rise of the 10-year treasury rate on stocks is discussed, which will be a very important subject in the months ahead.