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Last year, as Treasury yields climbed, stocks mostly shrugged off the move. The spin from strategists: Yields are rising because of expected economic growth, so everything’s copacetic. And with anticipation that rate cuts from the Fed were forthcoming, there was yet another reason to remain calm.
Investors are no longer chill where the 10-year yield (^TNX) is concerned. It’s pushing up toward 4.8%, touching late-2023 highs.
One reason is that this time, the rise is accompanied by data showing that inflation is reaccelerating, notably in 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 year. Now they may have to adjust those forecasts even further, especially given that incoming President Trump’s fiscal policies are broadly seen as potentially inflationary — a sentiment at the forefront of the minutes from the Fed’s December meeting.
“My main fear is that the inflation genie was never quite put back in the bottle after the Covid spike in inflation,” Jurrien Timmer, director of global 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 in the high twos, go back into the threes and maybe three and a half or four. It’s not a prediction, but that’s a scenario that would, I think, prevent the Fed from cutting rates further.”
This, said Timmer, is not a scenario the market is pricing in right now.
There’s debate over what level in the 10-year yield would 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 year.
Michael Arone, State Street Global Advisors chief investment strategist for its US SPDR Business, said that earnings — not fiscal policy, not the Fed, and not Trump — will determine where stocks go this year.
“From my perspective, I think investors are wrongly obsessed with how many Fed rate cuts we’re going to get this year,” Arone said in an interview. “Earnings are growing, and I think that’s where the focus should be.”
