Rebound Attempt Driven by Drop in Treasury Yields

Some of the items that have reportedly been working against the stock market for a while now are working in its favor at the moment. Treasury yields are lower; oil prices are lower; and the dollar is weaker. In response, the equity futures market is trading higher.

Currently, the S&P 500 futures are up 12 points and are trading 0.3% above fair value, the Nasdaq 100 futures are up 67 points and are trading 0.5% above fair value, and the Dow Jones Industrial Average futures are up 69 points and are trading 0.2% above fair value.

That’s not exactly a rip-roaring rally effort relative to the losses the major indices have suffered since the start of August, but at least it is something and that “something” looks to be honing in on Treasury yields.

The 2-yr note yield, 10-yr note yield, and 30-yr bond yield hit 5.17%, 4.88%, and 5.01%, respectively, in overnight trading. The move above 5.00% for the 30-yr bond, though, appeared to be a technical buying trigger from an oversold position. The 2-yr note yield has since slipped back to 5.08%, the 10-yr note yield has dropped to 4.73%, and the 30-yr bond yield has fallen to 4.87%.

A weaker-than-expected ADP Employment Change Report for September helped ease things a bit, but it’s important to note that the bulk of improvement from the overnight high yields occurred in front of that 8:15 a.m. ET release.

Briefly, ADP estimated that 89,000 jobs were added to private-sector payrolls in September (Briefing.com consensus 150,000) following an upwardly revised 180,000 (from 177,000) in August. Small businesses added 95,000 jobs, medium establishments added 72,000 jobs, and large businesses shed 83,000 employees. It was noted that job stayers saw a 5.9% year-over-year pay increase, which was the 12th straight month of slowing growth.

Another interesting component of the report is that the leisure/hospitality industry was basically responsible for the job gains in September, adding 92,000 jobs. We find this interesting because there was a rush to label this report as an encouraging report for the policy outlook (i.e., bad economic news is good news), but one shouldn’t forget that the leisure/hospitality industry is a hotbed of discretionary spending, and that is still where the bulk of the job growth can be found, so it’s not exactly a telltale signal of weak demand.

We digress.

A sorely oversold market (and simply a sore market that has taken a beating in recent weeks) liked the headline at face value. Now, we will have to wait and see how it interprets the September ISM Non-Manufacturing Index (Briefing.com consensus 53.7%; prior 54.5%) at 10:00 a.m. ET. That is a report that will carry some market-moving cachet.

That isn’t all that is on the market’s mind, however. Mortgage application demand hit its lowest level since 1996; KeyBanc Capital Markets downgraded Apple (AAPL) to Sector Weight from Overweight; and the House, in an unprecedented action, voted 216-210 after yesterday’s close, to remove Kevin McCarthy (R-CA) as Speaker of the House.

House business will now be at a standstill until a new Speaker is elected, but the added rub is that the motion to dismiss McCarthy was driven by a wing of his own party that didn’t like how he worked with Democrats to avert a government shutdown. From a market standpoint, that understanding is creating added uncertainty about the ability to broker a deal to avert a shutdown after November 17 when the current continuing resolution expires.

That might become a more nettlesome point down the road, but the rebound path the stock market is ahead of the open leads back to the lower yields in the Treasury market.

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Originally Posted October 4, 2023 – Rebound attempt driven by drop in Treasury yields