A few days ago, after discussing the CPI and PPI data, I was quite concerned that something like this might happen, but the reaction of the US stock market has been good. I even wondered if the US stock market had become overly FOMO, considering that the current macro data looks very bad, with rising oil prices in the US, increasing inflation, and unresolved geopolitical conflicts.
Although the US stock market has been rising, the 10-year Treasury yield has already reached 4.56%, and the 20-year and 30-year Treasury yields have exceeded 5.1%. The market is not only worried about whether the Federal Reserve will not cut interest rates, but also concerned about long-term financing costs.
I don't know if today's drop is due to the sudden realization of poor macro conditions or because the visit to China did not yield clear results, but in any case, the pressure on the bond market has been gradually increasing.
We are no longer discussing whether the Federal Reserve will cut rates or when they will cut rates, but it is now possible that a recession could actually occur. Rising long-term rates will suppress US finances. The US Treasury needs to continuously issue debt for financing; the higher the rate, the higher the interest expense. The higher the interest expense, the larger the deficit; the larger the deficit, the more debt needs to be issued in the future, and the more debt issued, the higher the term premium demanded by the market.
This is also why Trump has consistently urged the Federal Reserve to cut rates. However, currently, this inflation would not allow for an immediate rate cut even if Waller took over. The US stock market can certainly continue to rely on AI and profits to hold up, but the premise is that oil prices cannot continue to push inflation higher, PCE cannot continue to deteriorate, the Federal Reserve cannot turn hawkish again, long-term bond auctions cannot continue to be weak, and dollar liquidity cannot significantly tighten.
Otherwise, it is highly likely to lead to a recession. Then we start over.
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