Breadth divergence is a troubling sign for the stock market

10-year Treasury yield ticks higher to start August

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Longer-dated Treasury yields ticked higher to start the month on Monday, while short-term rates fell as investors weighed prospects for recession and the pace and scope of future Fed rate increases.

What yields are doing
  • The 2-year Treasury note yield

    fell to 2.88% compared with 2.897% at 3 p.m. Eastern on Friday. Yields and debt prices move opposite each other.

  • The yield on the 10-year Treasury note

    was 2.656% versus 2.642% on Friday afternoon.

  • The 30-year Treasury bond

    yielded 3.021%, up from 2.976% late Friday.

What’s driving the market

Rising fears of a recession were cited for knocking down yields last week and in August. The 2-year yield moved further above the 10-year rate early last week, deepening an inversion of a measure of the yield curve seen as a reliable recession warning signal.

The Fed last Wednesday ended its two-day policy meeting with another 75-basis-point rate hike in an effort to curb soaring inflation. Fed Chair Jerome Powell said last week that another 75 basis-point move could be considered in September but that the Fed would take a data-dependent, meeting-by-meeting approach to decisions.

Powell also warned that the economy would need to see a period of below-trend growth to rein in red-hot inflation and that the path to a so-called soft landing for the economy continued to narrow.

The 2-versus-10-year measure of the curve lessened its inversion as rates at the short end fell more sharply as investors scaled back expectations around future Fed rate increases.

Meanwhile, investors will be paying close attention to economic data, culminating in Friday’s July jobs report. Nonfarm payrolls and other employment data will be parsed for signs a still strong labor market is beginning to show cracks.

On Monday, the Institute for Supply Management’s closely watched manufacturing index for July is due at 10 a.m. Data on July construction spending is also slated for 10 a.m., while the final July reading of the S&P manufacturing purchasing managers index will come out at 9:45 a.m.

What analysts say

“With Fed policy now in the range of what the Fed views as neutral, it’s natural to expect that it will likely be appropriate to slow rate increases ‘at some point,’ as Powell noted. However, we do not believe we are at that point yet,” said John Canavan, lead analyst at Oxford Economics, in a note.

“Currently, markets are pricing only about a 30% chance of a 75bp rate hike at the September meeting, with an implied rate forecast for September of 2.90%. That is down from above 3.10% just after the June CPI release earlier this month,” he wrote. “The market-based probability of a 75bp hike should increase as inflation remains uncomfortably high this year, and the market’s implied fed funds rate for December of around 3.28% is also likely to be adjusted upward.”

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