Stocks and bonds are experiencing a "tale of two extremes"! One hits a new high while the other issues an economic warning signal
The U.S. stock market reached a historic high amid expectations of a Federal Reserve interest rate cut, with the S&P 500, Dow Jones, and NASDAQ all hitting new highs. However, the U.S. Treasury market is sending signals of economic pessimism, as the 10-year Treasury yield fell below 4%, raising concerns among investors about the economic outlook. Analysts point out that the stark contrast between the optimism in the stock market and the pessimism in the bond market may exacerbate worries about the health of the economy
According to Zhitong Finance APP, on Thursday, the U.S. stock market once again reached a historic high driven by optimistic expectations that the Federal Reserve may soon cut interest rates, with the S&P 500 Index, Dow Jones Industrial Average, and NASDAQ Composite Index all setting closing records. However, in stark contrast to the exuberance of the stock market, the U.S. Treasury market is sending more pessimistic signals, as investor concerns about the economic outlook continue to escalate.
Bob Savage, head of macro strategy at BNY, stated that the current stock market generally interprets interest rate cuts as a catalyst for accelerated corporate profit growth, while the bond market believes that behind the rate cuts are potentially deeper economic issues. "The question is, who will misjudge?" he pointed out.
Data shows that the yield on the 10-year U.S. Treasury bond briefly fell below 4% during trading, marking the lowest level since early April. As yields declined, the price of the iShares 20+ Year Treasury Bond ETF (TLT.US), which represents long-term Treasuries, rose. As of 3 PM New York time on Thursday, the yield on the 10-year U.S. Treasury bond was reported at 4.01%, the lowest closing level since April 4.
Savage warned that once the 10-year yield falls below 3.5%, concerns about the health of the economy will significantly intensify. "Investors hope to hear some assurances at next week's Federal Reserve meeting that the economy is not in recession," he said.
The Consumer Price Index (CPI) for August released on Thursday showed that, influenced by tariff transmission, the pace of increase in commodity prices has accelerated, while inflation in the service sector remains above the Federal Reserve's ideal level. However, the overall inflation level is not sufficient to prevent the Federal Reserve from cutting interest rates next week.
The S&P 500 Index rose by 0.85%, the Dow increased by 1.36%, and the NASDAQ gained 0.72%. Emily Bowersock Hill, CEO of Bowersock Capital Partners, stated, "Investors are now in the 'greed phase'." She originally expected a slight adjustment in the stock market in September, but now that September is more than half over, market momentum remains strong, and a pullback is "very unlikely to occur."
Since 2024, the Federal Reserve has maintained the federal funds rate in the range of 4.25% to 4.5%, having cut rates by a total of 1 percentage point over the past year. Historical data shows that when the Federal Reserve cuts rates during non-recession periods, the stock market typically performs strongly in the following 12 months.
Despite the seemingly optimistic stock market, economic data shows signs of weakness. In August, non-farm employment added only 22,000 jobs, and recent data revisions indicate that employment conditions over the past year have been even weaker. The continued softening of the labor market is considered one of the core reasons for the Federal Reserve to accelerate interest rate cuts.
At the same time, influenced by the new tariff measures announced intermittently by the Trump administration since April, the actual tariff burden on American consumers rose to 17.7% in August, the highest level since 1934. PIMCO economist Tiffany Wilding pointed out that the transmission of tariffs to commodity prices is gradually becoming evident, posing a challenge for the Federal Reserve in controlling inflation Finance Minister Besant stated that the costs brought by tariffs are controllable, but if the Supreme Court ultimately rules the tariffs illegal and demands a refund, it will have a serious impact on the Treasury.
Mark Gibbens, Chief Investment Officer of Gibbens Capital Management, pointed out that the capital investment boom brought by artificial intelligence and the continued growth of consumer spending are supporting the rise of the stock market. However, the deterioration of the labor market may become a turning point. "If the labor market triggers significant changes in consumer behavior, it will become a bigger market story."
