Global Markets Weekly Wrap KW 42 : U.S. Stocks Reflect Rising Treasury Yields as Economic Growth Slows

This week in the U.S. stock market, the S&P 500 saw its recent six-week streak of gains come to an end, pressured by rising U.S. Treasury yields. As Treasury market futures indicate a potential flattening of the Federal Reserve's rate-cutting trajectory, equities appeared to respond accordingly. Large-cap stocks showed more resilience compared to small-caps, while growth stocks outperformed value stocks, with the tech-focused Nasdaq Composite showing modest gains. This dynamic underscored a challenging environment for stocks as bond yields continued their upward climb, influencing investor sentiment across asset classes.

Tesla made waves in the market, not only leading the S&P 500 but also outperforming the "Magnificent Seven" group of large-cap tech leaders. The electric vehicle giant posted robust quarterly earnings and projected vehicle sales growth of 20% to 30% in 2025, propelling the stock to its most significant single-day gain (22%) in over a decade. In contrast, Apple saw its stock struggle after Wall Street analysts downgraded their outlook due to anticipated softer sales for the new iPhone 16, acting as a counterbalance to Tesla's surge and dampening broader market performance.

In economic data, the Fed's Beige Book was a notable release in an otherwise sparse week. This summary of economic conditions highlighted a sluggish U.S. growth landscape, with limited expansion across most regions. The report noted slight easing in demand for labor and a gradual moderation in inflation, providing some insight into the Fed's evolving perspective on the economy. Nevertheless, these observations did little to stem the upward movement in long-term Treasury yields, which had been climbing since late September. On Monday, the 10-year U.S. Treasury yield rose by about 10 basis points to 4.20%, a level it maintained throughout the week, reflecting reduced market expectations for a significant rate-cutting cycle by the Fed over the next year.

T. Rowe Price's Head of Fixed Income and Chief Investment Officer, Arif Husain, sees room for further increases in the 10-year Treasury yield, which he projects could reach 5% within the next six months. Husain attributes this potential rise to sustained U.S. fiscal spending, elevated Treasury issuance, and a rekindling of inflation expectations, all of which could contribute to a prolonged sell-off in long-term Treasuries. Additionally, tax-exempt municipal bond yields moved sharply higher, aligning with the upward trend in Treasuries. This week's issuance remained active, and traders expect a steady pace until the election.

Corporate bonds, while weaker at the beginning of the week, showed stability later, with light issuance across the board and about half of the offerings oversubscribed. However, high-yield bond volumes were relatively low due to broader macroeconomic uncertainties and higher Treasury yields, though primary issuance continued to be robust. T. Rowe Price traders reported that the higher interest rate environment provided technical support for bank loans, which largely avoided the macro weakness felt elsewhere, thanks to their floating-rate coupons.

Turning to global indexes, the Dow Jones Industrial Average closed the week at 42,114.40, down 1,161.51 points or 11.74% year-to-date. The S&P 500 ended at 5,808.12, declining by 56.55 points for a year-to-date increase of 21.77%, while the Nasdaq Composite rose slightly to 18,518.61, up 23.36% year-to-date. The S&P MidCap 400 dropped to 3,107.51, and the Russell 2000 settled at 2,207.99, reflecting a mixed performance across various segments of the U.S. equity markets. These figures, sourced from Reuters and obtained through Yahoo! Finance and Bloomberg, provide a snapshot of the week's volatility and the challenging environment for investors across all sectors.

In Europe, stocks declined due to anticipation that the Federal Reserve's rate cuts may proceed at a slower pace than expected. The STOXX Europe 600 Index ended the week 1.18% lower, with major European stock indexes also in the red. Italy's FTSE MIB fell by 1.22%, France's CAC 40 dropped 1.52%, Germany's DAX declined 0.99%, and the UK's FTSE 100 Index shed 1.31%. Eurozone business activity, as indicated by the composite Purchasing Managers' Index (PMI), showed contraction in October, with a reading of 49.7—reflecting shrinking demand in both manufacturing and services. Economic sentiment across the euro area continues to be influenced by concerns over a slowing growth trajectory, with policymakers at the European Central Bank (ECB) expressing mixed views on the path for future rate cuts.

In Japan, both the Nikkei 225 and TOPIX indexes fell, pressured by economic uncertainty surrounding the general election on Sunday, October 27. The yen weakened against the U.S. dollar, reaching a range in the 151 JPY per USD range. Inflation indicators revealed a slight slowdown, with the core consumer price index (CPI) in Tokyo rising 1.8% year-on-year in October, slightly below the previous month's 2.0%. Bank of Japan (BoJ) Governor Kazuo Ueda highlighted the need for a balanced approach, as the country's 2% inflation target remains elusive.

China's equity markets saw gains as the central bank implemented stimulus measures to support the economy, with the Shanghai Composite Index advancing 1.17% and the blue-chip CSI 300 rising by 0.79%. In contrast, Hong Kong's Hang Seng Index declined 1.03%. The People's Bank of China (PBOC) injected RMB 700 billion into the banking system and maintained the lending rate at 2%, contributing to a positive but tempered sentiment. With RMB 789 billion in loans set to mature, this operation led to a net withdrawal of RMB 89 billion in October. The PBOC's recent stimulus package, which included a 25 basis point reduction in loan prime rates, aims to revive domestic demand in an environment of economic deceleration.

Chile's central bank reduced its monetary policy rate from 5.50% to 5.25% in response to easing inflation and other economic conditions. Officials pointed to U.S. Fed interest rate cuts, Chinese stimulus, and fluctuating oil and copper prices as significant factors affecting Chile's economy. Chile's consumer price index (CPI) inflation fell to 4.0% in September, aligning with policymakers' expectations.

In Turkey, economic rebalancing continued, though the disinflationary process has been gradual. T. Rowe Price's sovereign analyst, Peter Botoucharov, reported positive sentiments from recent meetings with the Turkish finance minister and central bank officials. With a stronger foreign exchange reserve position and ongoing current account adjustment, Turkey's economic rebalancing efforts remain underway. However, upcoming wage negotiations may impact inflationary pressures, with proposed wage increases being a key point of interest for both investors and policymakers.

Looking ahead, several major economic reports are expected, including the U.S. nonfarm payrolls, jobless claims, and GDP. Additionally, economic indicators from Japan, Australia, Hong Kong, and the Eurozone will provide further insights into global economic momentum. These data points will likely influence the bond and equity markets as investors monitor interest rate policies and inflation trends across regions, shaping the trajectory for the weeks to come.