Rising Treasury Yields and Labor Market Resilience: Shifting Tides in U.S. Financial Markets

Yields on Treasury bonds have revisited recent local highs, compelling equity investors to reassess their discounted cash flow stock valuations. The yield on the 10-year bond touched 4.99% on Thursday, while the 2-year bond yield advanced to 5.25%. The market capitalization of major U.S. stock indices dipped by 1-1.5% yesterday, and today, there's cautious growth. However, the risks are skewed toward further declines. Several robust macroeconomic reports on the U.S. economy today included initial claims for unemployment benefits, which increased by only 198,000, close to the current business cycle's low of 182,000, which began post-pandemic:In the U.S., individuals classified as unemployed are those who have been unable to find work for more than four weeks. Thus, a decrease in initial claims for unemployment benefits suggests that finding employment has become easier. This aligns with the growth in job vacancies reported by the JOLTS agency. The latest figures indicated a sharp rise in job openings compared to the previous month:When the influx of unemployed individuals slows down, it generally reflects increased household confidence in future income, leading to higher consumer optimism and a greater willingness to spend rather than save. In turn, this fuels economic growth. Reduced initial claims for unemployment benefits also mirror increased corporate confidence, reflecting business owners' expectations regarding changes in demand for their goods or services. If they anticipate higher demand, they are more likely to increase their workforce. However, the shift in U.S. Treasury bond yields does not entirely resemble a mid-term Fed cycle reassessment. Data on U.S. government debt ownership shows that China is actively reducing its holdings of U.S. debt obligations, with its share shrinking by another $16 billion in August:Since the beginning of 2022, China has sold $235 billion worth of U.S. bonds. There is a risk that at some point, the correlation between U.S. Treasury bond yields and the U.S. dollar will shift from positive to negative. For now, though, investors are focused on incoming data on the U.S. economy and the Fed's response to this information.Considering that the incoming data is increasing pressure on the Fed to signal another rate hike to the markets, there's a growing risk that the upward movement of the dollar will persist, and risk assets will face even greater pressure. Regarding the S&P 500, the risk of a retest of the lower trendline of the ascending channel is rising, as the initial failed attempt did not lead to a sustainable rebound and a return to an upward trajectory: