The "dual rise" of U.S. stocks and bonds corresponds to "two narratives": U.S. Treasury pricing reflects "slowing employment," while U.S. stock pricing reflects "accelerating economy."

Recently, the U.S. stock and bond markets have risen in tandem, but beneath this seemingly consistent appearance lies a starkly different judgment on the economic outlook: the bond market is pricing in "job slowdown," while the stock market is betting on "economic acceleration."

On Monday, September 8, U.S. Treasury yields fell across the board, with long-term bonds performing particularly well, pushing the 30-year Treasury yield to decline for the year, while the 10-year Treasury yield hit a new five-month low. Meanwhile, in the U.S. stock market, the Nasdaq touched a historic high during the day before retreating but still closed higher, with tech giants providing major support. This simultaneous rise in stocks and bonds occurred ahead of key employment data revisions, inflation reports, and the Federal Reserve meeting, with relatively light trading in the U.S. market.

However, this "dual rise in stocks and bonds" is not based on a unified optimistic expectation. Tony Pasquariello, head of Goldman Sachs' hedge fund business, explicitly pointed out this divergence in a client report, stating that "the bond and stock markets are anchoring their pricing to different economic narratives," indicating a split in the market's outlook on employment and economic growth.

Bond Market Pricing "Job Slowdown"

The story in the bond market is more straightforward, focusing on signs of a cooling U.S. economy. The decline in Treasury yields on Monday, especially the significant drop in long-term yields, reflects growing investor belief that an economic slowdown will prompt the Federal Reserve to adopt a more accommodative monetary policy.

Tony Pasquariello's analysis visually reveals this logic through charts. He pointed out that the trend of the 5-year U.S. Treasury yield is highly correlated with Bloomberg's U.S. Labor Market Surprise Index. This means that whenever employment data falls short of expectations, bond yields tend to decline. Currently, the bond market is "primarily focused on the slowdown in the domestic labor market," and thus "pricing in a more aggressive Federal Reserve."

At the same time, market expectations for interest rate cuts are heating up, providing support for bond prices. As investors prepare for the upcoming revisions to employment data and inflation data this week, the pricing logic in the bond market clearly points to a "bad news is good news" pattern: the weaker the economic data, the greater the likelihood and extent of Federal Reserve rate cuts.

Stock Market Betting on "Economic Acceleration"

In contrast to the caution in the bond market, the stock market seems to be looking past the current economic bumps, anticipating a brighter future. Although the major U.S. stock indices struggled near the flat line on Monday, the resilience of large tech stocks and some cyclical stocks suggests that investors are not panicking due to signals of economic slowdown Tony Pasquariello believes that the stock market is "looking forward to a cyclical acceleration," and part of this confidence stems from "supportive monetary and fiscal policies." Data shows that the performance of mid-cap stock indices is correlated with Bloomberg's U.S. survey data and the unexpected index of business cycle indicators, indicating that the stock market is more sensitive to the long-term economic outlook.

Goldman Sachs' trading department has also observed that long-only investors are actively buying technology stocks, while funds have continued to flow into non-technology cyclical stocks in recent months. This indicates that investors are voting with their actions, betting that the economy will recover under policy stimulus.

This divergence is not limited to the stock and bond markets. On Monday, gold prices soared above $3,600 per ounce, setting a new historical high. Meanwhile, the U.S. dollar index weakened to its lowest closing price since July 25.

These cross-asset movements further highlight the uncertainty and multiple bets investors have regarding future paths as key economic milestones approach. In the next two weeks, the U.S. will release significant data, including CPI data, revisions to non-farm payroll data, and the Federal Reserve's interest rate decision.

Risks and Consensus

Although the narratives in the stock and bond markets seem to be at odds, Goldman Sachs' report also provides a reconciliatory perspective. Tony Pasquariello's colleague points out that the market is currently pricing in about 1.7% GDP growth for the next four quarters, which is not far from Goldman Sachs economists' prediction of 1.5%. At the same time, the interest rate market is pricing in five rate cuts from September this year to June next year, which is "completely consistent" with Goldman Sachs economists' expectations.

From this perspective, the pricing in the stock and bond markets may not be entirely contradictory: the bond market is pricing in the current economic slowdown and necessary policy easing, while the stock market is pricing in the eventual outcome of successful policy easing guiding the economy towards recovery.

He stated, "I have been in this market long enough to understand the importance of respecting the signals from the interest rate market. I also believe in the discounting ability of the stock market. In short, bonds are smart... and so are stocks. However, sometimes the signals from the two markets seem to diverge—this is one of those times, so it's worth exploring the reasons."

However, risks still exist. Tony Pasquariello cites Goldman Sachs strategist Ben Snider's view, reminding that since the market has heavily priced in rate cut expectations, once the stock market truly begins to worry about growth prospects, its downside potential may be opened. Conversely, if the labor market unexpectedly remains strong, bond prices, which are already at high levels, will face the risk of a correction.