Wall Street’s major stock indexes ended the trading session around 1 percent lower on Oct. 7, while the 10-year U.S. Treasury yield rose above 4 percent for the first time since August. The rise in yields and retreat in stocks could reflect investor concerns that the Federal Reserve might keep interest rates higher for longer following last week’s stronger-than-expected jobs report, along with worries about rising tensions in the Middle East.
At closing bell, the Dow Jones Industrial Average fell 398.51 points, or 0.94 percent, to 41,954.24; the S&P 500 dropped 55.13 points, or 0.96 percent, to 5,695.94, and the Nasdaq Composite shed 213.94 points, or 1.18 percent, to 17,923.90.
Stocks rallied in recent weeks on optimism that the Federal Reserve would continue on its interest rate-cutting trajectory after delivering an outsized 50 basis point reduction at its most recent policy meeting on Sept. 18. However, a stronger-than-expected jobs report last week has cast doubt about the pace and extent of this rate-cutting cycle. The CME FedWatch Tool indicates that investors now see an over 84 percent chance of a 25-basis-point cut at the Fed’s November meeting, down from earlier bets on a larger reduction.
The 10-year Treasury yield, which had already climbed over 20 basis points last week, continued its upward trajectory on Monday, breaking above 4 percent for the first time since summer. The 2-year yield also briefly broke above 4 percent on Oct. 7, bringing the 10-2 yield curve close to inversion—a signal often associated with economic uncertainty.
“That’s not unusual. It likely persists for a bit,” Garvey wrote, noting that the 10-year yield rose by 20-50 basis points after the first cut of a new rate-cutting cycle during the 1990s and into the new millennium. He predicted that the yield would remain elevated until a significant downturn in labor market data occurred.
“History also shows that the 10-year yield ultimately hits a level lower than seen at the first cut. A material sub-optimal payrolls number can spark that move. Till then, it’s up,” he wrote.
After that, Garvey predicted that the 10-year yield would trend towards the 4.5 percent mark—and possibly higher if the U.S. government borrows more than expected, prompting “elevated” issuance of Treasury securities.
In addition to economic indicators, geopolitical developments may have added to market uncertainty on Oct. 7, the first anniversary of the Gaza war. On Monday, Hezbollah rockets hit Haifa, the third-largest city in Israel, which looked poised to expand its ground incursions into southern Lebanon.
Rising tensions in the Middle East appear to have led to concerns about oil supplies, with U.S. crude rising 3.71 percent on Monday to settle at $77.14 a barrel, while Brent rose to $80.93 per barrel, up 3.69 percent on the day.
The next major economic data release, the Consumer Price Index (CPI), is scheduled for Thursday. Investors and Fed officials alike will likely scrutinize the data closely for clues as to the trajectory of inflation, which has fallen from a June 2022 peak of 9 percent, the highest in around four decades.
