While the government shutdown continues to simmer in stall-out mode, the US-China 100% tariff announcement, set to go live on November 1, is sure to spice things up. As the proverbial pot-lid begins to rattle, markets are watching closely to see what bubbles up next. So far, the flight-to-quality trade has worked in our favor, with the 10-year Treasury yield retreating to the 4.0% level. But the question remains: what catalyst could push us into a full boil—or breach that 4.0% threshold?
The most obvious pressure point is labor market weakness. We’re now looking at nearly 1 million jobs retroactively removed from the books due to survey inconsistencies. September’s hiring plans were the lowest in 14 years, and seasonal hiring is projected to be the weakest since 2009. With the shutdown disrupting key data releases, we’re flying blind on the true unemployment rate, though it’s hard to reconcile any meaningful drop from the last reported 4.3%.
On the other side of the scale, longer-term yields continue to climb as investors demand more compensation for inflation risk. The 30-year yield is being driven up by concerns over persistent price pressures and fiscal imbalances. This tug-of-war between labor softness and inflation anxiety has kept rates range-bound for now. But unless Powell signals a higher terminal rate, resolution remains elusive, especially with potential trailing tariff effects still looming.
Then there’s the wildcard: uncertainty. Despite the macro steam rising up, both equities and gold are rallying in tandem, a rare pairing that suggests gold is being used as a hedge against a possible downturn. Stock valuations are running well ahead of fundamentals, increasing the risk of a sharp correction. With the Fed flying blind (though CPI is finally set to release at month-end), and markets pricing in rate cuts despite complete justification, volatility is likely to rise alongside the environmental risks already in play.
As the saying goes, where there’s smoke, there’s fire…and right now, the market is sending up smoke signals in every direction. Visibility is low, risk is high, and I’m personally prepared to stop, drop, and roll at a moment’s notice. I’m not saying this economic soup is boiling over quite yet, but in the event this pot of fiscal unease bursts into flames, be sure your pipelines have mapped out their emergency exit…
10yr: 4.0% is holding the line as well as the downward trend line.