The bond market became unruly last week
The bond market became unruly last week, with the 10-year Treasury yield ending higher at 5.16%. Since inflation expectations measures have stayed relatively stable, by process of elimination, recent moves have reflected real growth expectations and the term premium.
Geopolitics & commodity prices have remained key sources of uncertainty. While there was hope around the UN meeting early last week, it seems clear the global political situation remains fluid.
Central bankers know that they cannot control oil prices. But what they can do, as Fed Chair Warsh indicated at his recent press conference, is ensure that changes in relative prices don't broaden out. Policy can limit “second and third order effects in the economy.”
Against this backdrop, U.S. real growth does look solid. So, there’s room for policymakers to operate. The Atlanta Fed tracking estimate for U.S. real GDP growth in 3Q remained strong at +5% q/q A.R. last week. Core cap goods orders surged +1.6% m/m in Aug. The S&P mfg PMI increased to 57.0 in Sep. ADP’s weekly measure of private payrolls accelerated w/w last week, and initial jobless claims remained very low at 197,000.
Creative work arrangements (e.g., gig jobs, single-person online selling) are also likely part of why consumer spending has refused to buckle. There are flexible income-making opportunities available in the U.S.
With higher interest rates and higher oil prices operating with a lag, plus less stimulative fiscal policy, it would not be surprising to see economic growth moderate from its current strong pace. But how much? Monetary policy transmits to the economy through financial conditions, and these measures still appear acceptable (e.g., the Chicago Fed’s financial conditions index remains stable).
Bottom line: long-duration Treasuries may continue to struggle into the Fed’s next hike. However, the Financials sector is already showing some signs of being oversold in the equity market. This is not a financial crisis situation. A mid-cycle slowdown in the economy, ie, not a crisis/recession, argues for staying long equity leaders (consistent with Mag 7 breaking out & tech spreads now moderating).
True, the purpose of monetary policy tightening is to slow activity down. Tightening gets economic actors to do something tomorrow that they might have done today. But the Fed’s dot plot forecast suggests monetary policy tweaks, not an aggressive rate hike cycle – at least so far.
Interest rate-sensitive sectors have languished. U.S. housing data have remained very choppy, for instance. But other parts of fixed investment (e.g., AI capex, durable goods) have proved much less interest-rate-sensitive in 2026.
The U.S. labor market remains in a low-hire/low-fire mode, but it’s steady. With labor force participation in a downtrend (partly due to demographics & immigration policy changes), even small average job gains have been enough to keep the unemployment rate moving sideways. New business formation picking up has been another cushion.
If inflation expectations become unanchored, it will likely be the recent sequence of supply shocks (lockdowns, tariffs, reduced labor supply, oil prices spiking several times in the past few years due to geopolitical conflict), against a backdrop of an economy that has remained resilient, that causes it. Policymakers want some insurance against that outcome now. But the ultimate resolutions to these supply shocks are out of the central bank’s direct control – what they are doing is buying time for oil prices to come back down, etc. Some market angst with that backdrop is understandable.
Source: Strategas
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by Refinitiv.
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Fortem Financial
(760) 206-8500
team@fortemfin.com
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