U.S. bond yields are on the rise again, with the yield on the benchmark 10-year Treasury back up to 4.969% on Monday, just short of the widely-watched 5% threshold, having surged almost 30 basis points last week alone.
Yields on the benchmark 10-year Treasury rose briefly to 5% late last week, a level not seen since 2007.
The recent surge in long-term bond yields suggests the market has embraced the idea that rates will remain higher for longer, with a new normal for rates seemingly above the Federal Reserve’s pick of 2.5%.
Fed Chair Jerome Powell on Thursday said the stronger-than-expected U.S. economy might warrant tighter policy though rising market interest rates could make action by the central bank itself less necessary.
There will be a fresh update on the strength of the U.S. economy this week from data including third-quarter growth as well as the Fed’s favored measure of inflation, the core personal consumer expenditures price index.
Another factor pushing yields higher has been the predicted scale of U.S. borrowing, with Washington last week reporting a $1.695 trillion budget deficit for fiscal 2023, fully 23% higher than the prior year and above all pre-pandemic shortfalls.
U.S. stock futures edged lower Monday, starting the new week on a negative note, with rising bond yields and wariness ahead of major tech earnings weighing.
At 05:45 ET (09:45 GMT), the Dow futures contract dropped 60 points or 0.2%, S&P 500 futures fell by 5 points or 0.1%, and Nasdaq 100 futures dropped by 10 points or 0.1%.
The major indices suffered a difficult week last week, with rising U.S. Treasury yields [see above] weighing heavily. The broad-based S&P 500 dropped 2.4%, its first losing week in three, while the tech-heavy Nasdaq Composite fell 3.2% and the blue chip Dow fell 1.6%.
Aside from the rising yields and the uncertain situation in the Middle East, investors will be focusing on corporate results this week, with the earnings season ramping up as a slew of big tech titans are slated to report [see below].
Yet, even with uncertainty surrounding these numbers, a rally in the S&P 500 in the fourth quarter of 2023 “is more likely than not”, according to analysts at Morgan Stanley, in a recent note.
“Many are still leaning more long than they would like, to reduce the probability of missing out in a year in which narrow megacap strength has driven benchmarks,” the bank said.
The third quarter earnings season is well underway, and has so far been generally well received.
Overall, 17% of the companies in the S&P 500 have reported actual results for the third quarter, Factset reported on Friday. Of these companies, 73% have reported actual EPS above estimates, with, in aggregate, firms reporting earnings that are 6.6% above estimates.
This general positivity could be tested this week, particularly given the higher U.S. bond yields, with results due from a group of stocks whose gains have propelled the S&P 500 higher this year.
Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL) are due to report on Tuesday, Meta (NASDAQ:META) is to report on Wednesday and Amazon (NASDAQ:AMZN) reports on Thursday.
Those stocks, together with Apple (NASDAQ:AAPL), Nvidia (NASDAQ:NVDA) and Tesla (NASDAQ:TSLA) have accounted for the bulk of the S&P 500’s 10% year-to-date gain, so any disappointing results could result in widespread fallout.
Foxconn (TW:2354), a major supplier of Apple’s iPhones, is facing a tax probe in China, according to a report in the state-backed Global Times newspaper, released on Sunday.
The tabloid said some of Foxconn’s key subsidiaries in China were the subject of tax audits and that China’s natural resources department had conducted on-site investigations on land use by Foxconn enterprises in Henan and Hubei provinces.
The public announcement of this audit comes with Foxconn founder Terry Gou seeking to be Taiwan’s next president in January, and with Foxconn shifting some of its production lines from China to India.
“We will actively cooperate with the relevant units on the related work and operations,” Foxconn said in a statement,
Foxconn is the world’s largest contract electronics manufacturer, and assembles consumer products like iPhones for Apple.
Apple (NASDAQ:AAPL) stock fell 0.6% in premarket trading.
Crude prices fell Monday as aid convoys began to arrive in Gaza, but geopolitical tensions remained high as Israel continued to bombard the enclave.
By 05:45 ET, the U.S. crude futures traded 0.5% lower at $87.64 a barrel, while the Brent contract dropped 0.4% to $91.83 a barrel.
Both contracts rose more than 1% last week for a second consecutive weekly jump on fear of potential supply disruption if the Israel-Hamas war grows into a wider confrontation in the Middle East, the world’s biggest oil-supplying region.
Israel has so far held off launching a ground assault on the region, likely providing time to negotiate a release of more hostages as well as providing a window for diplomacy. Hamas released two U.S. hostages from Gaza late last week.
U.S. President Joe Biden visited Israel last week, and the leaders of France and the Netherlands will visit this week in search of a solution for the conflict.
That said, Israel has amassed forces around Gaza for a planned ground invasion to eliminate the Islamist group, and it’s this ground attack which is widely seen as a potential trigger for widening the Israel-Hamas conflict, potentially hitting supply in the important region.
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