Stocks are coming off a record high. But rising bond yields and oil prices are putting that rally to the test. The ten-year Treasury yield is sitting at its highest since 2002. Oil is hovering over $100 a barrel as attacks continue in the Strait of Hormuz. Joining us now is Michael Reinking, Senior Market Strategist at the New York Stock Exchange. Michael, great to be with you.
Great to be with you today. Thanks for having me back.
The S&P 500 hit a record high on Tuesday led by chip makers and then pulled back. Is this a normal pause or are higher bond yields starting to weigh on stocks?
We have definitely had a bifurcated market over much of the last couple of years — particularly since the end of August. The S&P 500 has been hovering right around all-time highs and we finally hit a new all-time high earlier this week. But if you look beneath the surface, there are plenty of areas of the market that have been under pressure. The equal weight version of the index and small and mid-cap indices are actually down 5 to 8% from their highs — really since we started to see interest rates move higher, triggered at the end of August when Chair Warsh gave his Jackson Hole speech. It has accelerated as we continue to see AI-related debt coming to market, geopolitical concerns in Europe around fiscal deficits, and what is happening with Iran where we are seeing preparation for a re-escalation. Despite the S&P 500 looking like it is sitting at all-time highs, it has been a difficult backdrop to navigate.
The ten-year Treasury yield is at its highest level in more than 20 years. Why does that matter and when does it become a real problem?
The ten-year yield is the benchmark for where all lending happens within the economy. We are approaching the point where you are starting to see some strains. A lot of it is related to the speed of the move. The primary borrowers driving a lot of current activity — namely AI-related demand — are not going to stop borrowing just because rates have gone up 25 to 50 basis points. They view that opportunity as too big and integral for their businesses. What happens is it starts to strain consumer lending. The housing market has very much ground to a halt. We are seeing strains in auto lending markets. The increasing prices and borrowing costs for consumers is weighing more broadly on the economy.
What did yesterday’s Fed minutes tell us and should investors brace for another hike?
Yesterday’s minutes showed broad support for the previous hike and pretty broad support for one additional hike this year. We have had two of the more influential Fed officials — New York Fed President Williams last week and Christopher Waller this morning — suggest that with the September hike, we can afford some patience in looking at how data comes in. That has pushed back on the idea of an October hike, which leaves us at the December meeting. Some mixed messaging coming there. The real question is what do rates do after that hike — are we on a really aggressive hiking cycle with three, four, or five rate hikes ahead, as opposed to one or two? The inflation backdrop is going to very much drive what that looks like.
Oil is moving back toward recent highs. What does that do for inflation?
There has been some disappointment around the IEA diesel release announced last week and the pace of those reserve releases. Markets have reacted to that. This definitely provides an inflationary impulse. If you look at the LMI — the Logistics Managers Index — they publish a monthly report on transportation costs, inventory costs, and warehousing costs. Their index has moved up to around 240 on average over the last couple of months. Their suggested breakeven level is 150. When you hit that 240 level, that starts to seep into supply-side inflation — transportation and warehousing costs start to get passed on to the end user. The overarching backdrop for inflation is not particularly positive as we look forward.
Can you sum up the week for investors?
We have continued to see strength in AI-related trades and weakness in those other areas of the market more impacted by higher oil and higher interest rates. I think it is really important to pay attention to how the financials are trading. Financials have been trading really, really poorly over the last couple of months and you are starting to see some acceleration there. I would watch the ICE Bank of America MOVE Index — the equivalent of the VIX for Treasury markets. And credit markets right now are the real keys to see if we get more signs that something is starting to break in the background. That is where I am focused — with a cautiously cautious tone in general.
Michael, thank you so much for joining us today.
Thanks for having me.
