On Tuesday morning, U.S. stocks began trading with losses, primarily due to the ongoing increase in bond yields, which has been dampening investor confidence.
Here's a breakdown of how the major indices are performing:
The primary driver behind these market movements continues to be the focus on bonds. The week started with significant volatility as the 10-year Treasury yield, a global benchmark, reached a 16-year high at 4.70%. In fact, this yield could potentially reach its highest level since August 13, 2007.
Susannah Streeter, Head of Money and Markets at Hargreaves Lansdown, pointed out, "The impact of robust U.S. economic data is still reverberating, with concerns growing about the likelihood of rising interest rates causing anxiety."
The recent rise in yields followed events such as the avoidance of a government shutdown over the weekend, stronger-than-expected results in the ISM manufacturing survey for September, and statements from Federal Reserve officials Michelle Bowman and Michael Barr indicating the central bank's inclination to maintain higher interest rates in response to persistent inflation.
Atlanta Fed President Raphael Bostic echoed this sentiment by stating, "I am not in a hurry to raise, not in a hurry to reduce either." He emphasized patience in the central bank's approach.
Higher implied borrowing costs, especially when they rise rapidly, tend to weigh on equities, particularly smaller companies that may struggle to secure financing. Additionally, increasing yields reduce the present value of future corporate earnings, impacting stock market valuations.
The Russell 2000 small-cap index saw a 1.6% decline on Monday, leaving it down 0.25% year-to-date. The S&P 500 showed marginal change on Monday, mainly due to the strength of large technology stocks that generate significant cash flow.
Jim Reid, a strategist at Deutsche Bank, highlighted the breadth of losses beyond the tech sector, noting that the S&P 500 equal-weight index declined by -1.11%, with only 22% of S&P 500 constituents posting gains on the day.
The short-term trajectory of bond yields and, consequently, stocks may hinge on upcoming jobs-related data. The August job openings report (JOLTS) is scheduled for release on Tuesday at 10 a.m. Eastern Time. Additionally, more labor market data, including the September ADP private sector employment report on Wednesday and weekly initial unemployment claims on Thursday, will provide insights into the next steps for interest rates. Finally, Friday will bring the highly anticipated nonfarm payrolls report for September, which will play a significant role in shaping expectations regarding interest rates.
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