Inside Markets — Higher Bond Yields

The September payroll print of +254,000 was tail-risk event (~4 standard deviations) with somewhat bullish implications for equities. The slowdown we saw in the July and August payroll data will be recast as a ‘summer soft patch’ as markets reprice for a ‘no-landing’ scenario. Part of that repricing includes higher bond yields and a spike in bond market volatility that need to be watched in the days/weeks ahead. A nonfarm payroll gain in +160,000-200,000 range would have delivered a more gentle repricing in bond yields and a more bullish equity market response. But, if inflation is solved, higher nonfarm payrolls point to a higher GDP growth trajectory and higher corporate earnings.

Today’s ‘somewhat’ bullish reaction to a very strong payroll report keeps the S&P 500 (SPX) tucked under technical resistance now at ~5810. A bullish bias is justified as long as the SPX remains above the 5667 post FOMC breakout with any upside dependent on earnings growth rather multiple expansion.

Note that a less-dovish Fed (fewer rate cuts) could limit the magnitude of an assumed China fiscal stimulus package by forcing Beijing to consider capital flight implications from a weaker yuan.