This is The Takeaway from today’s Morning Brief, which you can sign up to receive in your inbox every morning along with:
The US 10-Year Treasury Note yield (^TNX) jumped 9 basis points Wednesday to settle at 3.945% — the highest level since just before the mini bank panic in March.
This essentially confirms the message from the Federal Reserve today in its minutes from the June FOMC meeting — that “almost all” Fed members expect more rate hikes this year despite the pause last month.
“Higher for longer” is indeed the 2023 mantra on Wall Street — just don’t tell that to stocks, which are pricing in the softest of landings.
Meanwhile, the tech sector took a small hit in line with historical correlations (as tech stocks tend to prefer lower rates). However, some AI-hyped names like Microsoft (MSFT) were spared the red, while Alphabet (GOOGL, GOOG) managed an impressive 1.7% return. (Nvidia closed down, but its loss was limited to a measly 23 basis points.)
Bubble economics appear to trump real-world factors when it comes to stocks. And the technicals suggest the bullish moves aren’t over.
In fact, tech stocks this year have largely ignored persistently high longer-term rates, decoupling from last year’s tight correlation when the direction was down.
Even a mini bank panic couldn’t derail the growth names that have benefited from AI press. Arguably, the Fed’s liquidity provisioning to shore up the banking sector is now helping to fuel the broad-based bullishness, which is no longer confined to a few megacap and AI-themed stocks.
Looking at the real economy, the disparities persist. It’s no secret that manufacturing is in a global slump, but consumers around the world are shoring up economies by spending on services.
This helps explain why the S&P 500 is up 16% this year while the industrial metal copper is down 13% from its January peak. Sectors matter; copper cares about another Tesla factory much more than mom and pop taking a cruise around the Caribbean.
Time tends to correct most imbalances and irrationality in the markets, but Lord Keynes taught us (maybe) that the markets can remain irrational far longer than most investors can remain solvent.
Eventually, the manufacturing and services sectors will align again. The trouble is we don’t yet know when —or even the direction.
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