What Happened Last Week
- 10-Year Breaks 5%: Last week saw the 10-year break decisively above the psychologically significant 5% level.
- Tech Shrugged: Tech stocks brushed off the move in yields, with a new AI product launch from Meta powering the Nasdaq higher.
- Oil Relief: Crude prices fell on optimism about a potential deal with Iran, but weekend developments called that progress into question.
What We’re Watching This Week
- Global Inflation: Inflation reports from Europe, Japan, and the U.S. are due, with global central banks focused on inflation.
- More Fed Speakers: Investors will again focus on messaging from Fed members to help handicap the extent of a potential hiking cycle.
- U.S. Labor Data: This week will also see the release of several labor market reports.
Investment Management Team’s Views
Interest rates dominated the market conversation last week as the 10-year Treasury yield moved decisively above 5%, but we think the underlying message remains more constructive than the headline suggests. Stronger growth expectations, rather than renewed concern around U.S. debt dynamics, appear to be driving much of the move. That was especially clear after Wednesday’s strong purchasing managers survey showed business activity expanding at its fastest pace in more than five years and sparked another jump in yields. The flatter yield curve and stronger dollar tell a similar story, suggesting investors are responding to firmer growth and tighter Fed policy rather than demanding a materially higher risk premium on long-duration U.S. assets. Credit spreads widened modestly amid the volatility in fixed income, but that move was likely more technical than evidence of a broader deterioration in financial conditions.
Equities largely took the rise in yields in stride, reinforcing that stronger growth remains the dominant signal coming from markets. The Nasdaq-100 Index led gains as enthusiasm around Meta’s new AI product helped improve sentiment across technology and AI-related stocks, even as the 10-year yield hit its highest level since 2007. Falling oil prices also provided some relief as optimism around negotiations with Iran increased, although weekend developments have complicated that outlook and reversed the move. Growth stocks advancing alongside higher yields is an encouraging signal. Rates can eventually become restrictive, but for now, strong economic momentum and continued earnings growth related to the AI buildout appear sufficient to offset some of the pressure from lower valuation multiples.
The week ahead will bring several important readouts of the growth-and-inflation mix as the third quarter comes to a close. Wednesday’s inflation report will be closely watched, particularly alongside the Bureau of Economic Analysis’ annual revisions and methodological updates, while inflation readings from Europe and Japan later in the week will add to the global picture. Friday’s U.S. employment report remains important for the growth outlook and consumer spending, although we continue to think inflation will carry more weight for Fed policy than the labor market at this stage of the cycle. Together, the reports should test whether the recent move higher in long-term yields still reflects healthy economic momentum or is beginning to tighten financial conditions more meaningfully.