Last week, Inflation came in hot, but weaker than expected. Oil prices fell. The jobs report was soft. - The previous 2 months were revised lower, and the jobless rate increased. Yet, 10-year bond yields continued higher.
The AI buildout is tapping the debt market for funding. Government borrowing hasn’t slowed. We’re witnessing an uptick in the competition for capital, and this is driving yields higher. (More bonds being issues means the price of bonds goes down = Higher Bond Yields). The Fed’s rate hike strengthens their credibility. The economy is growing and it would probably take a larger change in Fed policy to derail markets.
Quick Comments: Higher rates and strong equities can coexist. We have oil above $100, the 10-year treasury crossed 5%, yet stocks are near all-time highs. This week’s Fed meeting will be in focus. The futures market is showing odds over 90% for a rate hike.
U.S. labor market statistics remain strong; however, the market may be weaker than the headline numbers imply. Unemployment is low, yet jobs are harder to find. For investors, this means the labor market is not causing meaningful bump of inflation.
Fed Chair Kevin Warsh delivered a distinctly hawkish message, emphasizing that inflation, not employment, is currently the Fed’s primary concern.
Fiscal concerns and long-term corporate bond yields were in focus last week. - A.I. is taking over the debt market. A.I. debt demand is high, so A.I. companies are issuing debt and this is increasing the supply of bonds. The elevated issuance of corporate bonds may be contributing to a rise in yields.