Wall Street ended the week in the red after a nearly 20 basis point jump in the U.S. 10 Year Treasury yield, and the latest consumer price index inflation report. U.S. Treasury yields jumped across the curve this week, with the benchmark U.S. 10 Year Treasury yield climbing nearly 20 basis points to 4.97%. CPI inflation rose 0.4% M/M in August, accelerating from July’s 0.1% gain.
Rising bond yields are one of the few forces in the world strong enough to get politicians to snap to attention. They also have a big impact on Americans’ personal finances and on the broader economy. The bond market dictates how much ordinary people have to pay on their mortgages and car loans, as well as how much they earn from their savings accounts and 401(k) plans. Most importantly, higher bond yields provide a risk free return that encourages pension funds, endowments and 401K administrators to sell equities and take safety in bonds.
For the week, the Dow fell 1.57%, the S&P lost 0.80%, and the Nasdaq handed back 0.66%.
Future Wealth’s View
The CPI report released this week is the final major inflation indicator the Fed will see before it holds its policy meeting on Wednesday. In addition to inflation concerns, several other factors are also pushing bond yields higher: The deficit is at an all time high forcing the government to borrow more to pay all its bills. Large tech firms are also borrowing heavily to build out the data centers powering AI. The Treasury’s attempt to lower the rates by doubling its buybacks have failed miserably. And last Friday, Federal Reserve Chair Kevin Warsh signaled that the central bank may still have to lift its short term rate in the coming months if inflation stays stubbornly elevated.
The worst job in the world this week is the one Kevin Warsh is facing. If he raises the interest rates, the stock market will sell off as rotation from equities to bonds accelerates and of course, Trump will promptly throw him under the bus on his 1am social media posts. If he lowers interest rates in the face of rising inflation, he will completely lose credibility amongst International Central Bank leaders and other economists as being another puppet to Trump. If he leaves interest rates unchanged, there will likely be 6-8 members of the Fed Board, voting for a rate hike, dissenting which means he has lost control of the Fed Reserve.
The honeymoon is over, Mr. Warsh.