The drop in house prices (FHFA, Case-Shiller) helped to push US Treasury yields down sharply on Tuesday & Wednesday. A spate of poor regional Fed survey data this week has also contributed.
Falling home prices are combining with a deflationary hit to tech stocks. Revenues at mega-cap technology companies have slowed. Meta has slumped a further 20% in after-hours trading, following a decline of 5.6% yesterday. Ordinarily, this combination of events would demand a Fed policy pivot, with lower US Treasury yields.
But it is not clear that the Fed will be able to deliver on that, when inflation is so far above target, and the unemployment rate so far below its natural rate. Treasury yields and the S&P 500 are engaged in a tug-of-war. In the short-term, the direction of 10-year Treasury yields could go either way from here.
The outlook for stocks may be a surer bet. Indeed, even if the 10-year Treasury yield falls below 4%, this may not be positive for the stock market.
Core services inflation in the US simply cannot support a Fed policy pivot just yet. As such, if 10-year Treasuries rally significantly, this will be because the outlook for company earnings will have deteriorated sharply. It will be hard for equities to stage an extended rebound in such an environment.
Ultimately, this is the inconsistency that lies at the heart of the equity bull thesis. A drop in 10-year Treasury yields below 4% could simply signal an earnings recession.
