Markets jitter with higher yields but remain solidly firm.

The equity markets pared early gains and dived lower but closed relatively flat for the S&P 500. This is despite a rising high yield.

Divergent of S&P 500 and Nasdaq

The whole trading day displayed the polar difference in the performance of the Nasdaq and S&P 500 again. The reason is the same. While the technology sector helped cushion a big fall from the S&P 500, regional banks’ stocks are plunging hard, given that the higher bond yield could cause a banking crisis for regional banks.

Government shutdown and Fed’s interest rate path

With the government shutdown, fear allayed till the middle of November; the Fed will not have sufficient data to make an informed decision on possible interest rate hikes in the next FOMC meeting. After all, there will not be disruption in economic data given the avoidance of a government shutdown.

This helps motivate the probability of a rate hike to 45%, a jump of 10%, putting pressure on equity markets once again.

With higher odds of interest rate hikes factoring into the economy, the bond yields reflect this new reality. The 10-year Treasury note yield rose 0.11% to hit 4.68%, moving closer to the 5% mark and a high level dating back to 2007 before the spark of the global financial crisis.

High Bond Yield Hit on Major Sectors

Indeed, the surge in the yields continued to hammer several vulnerable parts of the economy while defensive counters like utilities escaped from the raging downside pressure.

Gold, an asset that does not generate income, fell sharply to reach $1830 an ounce. It was the sixth consecutive loss and marked its lowest level since March. The higher yield would complicate the lure of gold as they are seen as competing assets.

Given the dollar strength supported by the bond market movement, we maintain neutral weighting on commodities, except for Brent and crude oil.

What’s on the menu today?

At 10 pm, we will have the important labour data JOLTs. We need to see a weakening of job openings to support the Fed’s movement towards a lower inclination to raise the rate.

A further sign of labour strength could motivate the Fed to hike another round of interest rates to cool the labour market, which is pivotal in contributing to an elevated level of inflation in the wider economy.

It is 3 October, Tuesday, 9 am in Singapore and 9 pm in New York. The market has been spectacularly weak and we remain cautious in the first half of October as a wide range of labour data will be released this week, focusing mainly on this Friday.

We hope you have a fruitful day at work and in school.