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It's been smooth sailing for stocks in 2024. The S&P 500 has gained nearly 15% and has been on a steady upward trend for the past two months.
Treasuries have been more volatile, thrown around by the swings in inflation data, hints about future policy decisions from Federal Reserve officials and higher-for-longer interest rates. But following a spike in yields in April and May, they've calmed a little and should end the first half nearly even.
The relatively benign picture for investors could be about to change, however. The Fed is preparing markets for the possibility that there could be no rate cuts this year. Add to that the noise surrounding the US election, and it could be a rougher second half.
Fed foibles: Treasury yields, which go up as prices fall, have moved higher this week as investors reacted to comments from Fed officials downplaying interest rate cut expectations.
On Tuesday, Fed governor Michelle Bowman said that she's expecting no rate cuts this year. San Francisco Fed President Mary Daly said Monday the Fed must be agile and "if inflation falls more slowly than expected, the policy rate must stay higher for longer."
Meanwhile, Chicago Fed President Austan Goolsbee was also particularly hawkish in his views, saying Monday that he would need to see "more months" of weaker inflation data to even begin to consider cutting rates.
Recent data is also spooking investors. Central Banks in Canada and the eurozone have both cut interest rates, but inflation rose in both of those regions last month. Australia, meanwhile, saw its inflation rate rise to 4% this week, stoking fears that the Reserve Bank of Australia could soon move to raise rates again.
Debt, deficits and debates: The unknowns of the current election cycle have also thrown investors for a loop — especially since neither President Joe Biden nor former President Donald Trump has indicated they plan to rein in the yawning budget deficit.
"With rates back on the upswing due to international price pressure concerns, an important consideration will be whether government debt, deficits and issuance will begin to matter again," said José Torres, senior economist at Interactive Brokers.
As debt goes up, investors often require a higher payout to purchase long-term Treasuries. That could also impact markets. The last 10% correction in stocks occurred as the 10-year Treasury yield touched 5% in October, Torres noted.
Earlier this week, 16 Nobel Prize-winning economists warned in an open letter that a second Trump administration wouldn't just fail to fix inflation — it would make matters worse.
The letter, organized by famed economist Joseph Stiglitz, argued there are valid reasons to worry the Trump agenda will "reignite" inflation.
In particular, the economists point to Trump's "fiscally irresponsible budgets" and nonpartisan research from the likes of the Peterson Institute, Oxford Economics and Allianz that finds the Trump agenda — if successfully enacted — would increase inflation.
What it means: For American consumers, a rising 10-year Treasury yield means more economic pain: expensive car loans, higher credit card rates and even more expensive student debt.
It also means that the cost of mortgages could increase. When 10-year Treasury yields go up, so do mortgage rates; when they go down, mortgage rates tend to follow.
What comes next: Investors are awaiting key economic data this week. The Fed's preferred inflation measure, the Personal Consumption Expenditures (PCE) price index, is out on Friday. That will provide investors with more information about economic forecasts and potential interest rate cuts. The US presidential debate is being hosted by CNN Thursday evening.
