Author: Gao Zhimo, Wall Street News
U.S. non-farm employment increased by only 29,000 in September, far lower than the expected 90,000. However, the 10-year U.S. Treasury yield quickly rebounded by more than 10 basis points to 5.30% after a brief dip, staged a V-shaped reversal.
A disappointing jobs report depressed short-term interest rate hike expectations but failed to shake long-term yields - Wall Street's real anxiety has shifted from the next interest rate hike to a thornier question: How long can the economy hold on if borrowing costs refuse to fall?
Real estate freeze, increasingly punitive consumer credit, high financing costs for weakly qualified borrowers - cracks in the 5% interest rate environment have appeared, only to be covered up by the gloss of the leading stock indexes.
Non-farm payrolls upset, the bond market only gave it half a day
Data from the U.S. Department of Labor on Friday showed that non-farm employment increased by only 29,000 in September, below the lower limit of all forecast intervals; the August data was revised down from 162,000 to 133,000, the unemployment rate rose slightly to 4.2%, and the average hourly wage growth slowed to 3.0% year-on-year.
Immediately, the two-year U.S. Treasury yield fell 10 basis points in a single day to 4.69%, S&P 500 futures rose 0.8%, and Nasdaq 100 futures rose 1.1%. CME Group FedWatch shows that the probability of raising interest rates in October has dropped from 22% to 17%. Thomas Simons, chief U.S. economist at Jefferies, said this data "should be the final nail in the coffin for a rate hike in October."
But the twist came quickly. The 10-year yield rebounded quickly from a daily low of 5.16% and touched 5.30% at midday, approaching Thursday's high of 5.34% since 2002. Throughout the week, the 10-year yield increased by about 12 basis points, rising for the fifth consecutive week; while the 2-year yield fell by about 3 basis points throughout the week, ending the previous six consecutive weeks of gains.
The differentiation of long-term and short-term trends points to the same conclusion: weak non-farm payrolls have lowered short-term interest rate expectations, but inflation, fiscal supply and term premiums still firmly support long-term yields.
Economists generally believe that data distortion stems from seasonal factors. According to Reuters, this year's Labor Day holiday falls at the end of the month, which historically has often resulted in low statistics. Initial jobless claims are still hovering at a 57-year low, with health care, construction and manufacturing maintaining net job gains and no signs of large-scale layoffs. Charles Tan, Chief Investment Officer of Global Fixed Income at Century Investments, judged:
"On the margin, this provides more reason for the Fed to stay on hold. But conversely, it only takes one or two hot inflation numbers for the market to return to a hawkish stance."
K-shaped differentiation at 5% interest rate
Equity investors are most concerned with how quickly yields rise, but the economy ultimately has to endure the sheer height at which yields stay.
"There is a huge disconnect between the real economy and AI/capital spending," said Brad Conger, chief investment officer at Hirtle & Co. Strong earnings and a wave of AI spending have kept major stock indexes near records - Nvidia hit an all-time high on Friday, with a market capitalization of $6 trillion, and the Nasdaq 100 closed at a record high. But under the index, market breadth has narrowed. The banking, industrial, and utility sectors weakened, with the KBW Bank Index falling 2.78% for the week. Among the three major indexes, only the Nasdaq rose 0.45% for the whole week, the S&P 500 fell slightly by 0.27%, and the Dow Jones Industrial Average fell 1.26%.
"I don't think there's a tipping point where everything suddenly collapses, but we're already in a range where certain industries are feeling painful," Conger said, pointing to real estate, autos, consumer loans and credit cards.
Nancy Tengler of Laffer Tengler Investments is relatively optimistic: "Sometimes rising yields are a good thing." She believes that if companies can borrow at 5% cost and generate 15%-20% returns, "they should do it all day long." Gallo Partners fund manager Michael Alfaro pointed out that the private sector's huge spending on data centers shows no sign of slowing down, and AI and aerospace-related companies are far more tolerant of high interest rates than traditional industries.
The real risk: How long high interest rates will last
The current economy still has a buffer against high interest rates.
Max Gokhman of Franklin Templeton pointed out that most U.S. homeowners hold fixed-rate mortgages with an average interest rate of about 4%, insulating against new interest rate shocks in the short term; only about 13% (about $570 billion) of U.S. non-financial corporate debt is due in 2027. It is estimated that the AI-related financing entities of approximately US$300 billion are mostly investment-grade companies with abundant capital and are not sensitive to capital prices.
But cushioning has a shelf life.
"5% is not the straw that breaks the camel's back, but it is another heavy sack on the tired hump, and if some of the weight is not lifted, collapse is only a matter of time," Gokhman said. "We're already seeing pressure on the economy in the latest jobs data and sentiment indicators."
A more dangerous scenario is that inflation continues to push yields higher while growth weakens at the same time. The conflict between the United States, Israel and Iran has pushed up energy prices, and diesel prices have hit a record high; the decline in refining capacity in the Middle East and Russia has made the supply of refined oil a new pressure point - the G7 announced on Friday the release of 100 million barrels of reserves through IEA coordination, focusing on diesel, and WTI crude oil fell by more than 5% during the session. Ongoing tariff frictions are also inhibiting companies' willingness to expand production, and the ISM survey shows that manufacturers' concerns about Canada's trade disputes continue to rise.
"Then equities and fixed income could fall simultaneously, repeating a scenario similar to 2022, with commodities becoming the only safe haven," Gokhman said. He and his team have added commodity allocations to the portfolio to hedge against this possibility.
Stress is also spreading across global bond markets. The spread between France and Germany's 10-year government bonds once widened to 150 basis points on Friday, hitting the widest level since the European debt crisis in 2012.
A non-agricultural report can temporarily lower short-term interest rate expectations, but long-term yields remain unchanged - the real test of the 5% era is how long it will last.