[US Stocks] Review of September 28–October 2 and Outlook for October 5–October 9: Employment Has Cooled, Yet Interest Rates Remain High
Review of September 28–October 2
For the week, the NASDAQ rose 0.5%, while the S&P 500 fell 0.3%, the Dow Jones Industrial Average dropped 1.3%, and the Russell 2000 declined 0.2%. Large-cap tech stocks supported the indices, but the equal-weighted S&P 500 fell for the seventh consecutive week. Rather than the overall market being strong, it was a week where capital skewed toward AI-related stocks, whose profit growth is easier to explain.
At the start of the week, selling spread due to rising crude oil prices and long-term interest rates, with the 10-year Treasury yield reaching a 24-year high of 5.34% on the 1st. However, PCE price data and employment statistics came in below expectations, causing the probability of an October rate hike to fall from 64% the previous week to around 23%. Even so, the 10-year Treasury yield returned to 5.28% by the weekend. It is possible that energy prices, fiscal and government bond supply-demand dynamics, and the capital demand to fund AI investments are pushing up long-term interest rates more than the outlook for policy rates.
On the 2nd, employment growth slowed to 29,000, and the NASDAQ rose 1.19%. On the NYSE, advancing stocks outnumbered decliners by 1.67 to 1. However, against 57 new highs on the NASDAQ, there were 224 new lows. The VIX was also low at 15.52, indicating that fear has receded, but the sustainability of buying has yet to be confirmed.
Verifying the previous forecast
The central scenario of “AI stocks supporting indices under high interest rates, while small-cap stocks lag” held true. However, the 10-year Treasury yield exceeded the assumed 5.0–5.2% range, and interest rate pressure was stronger than expected.
Under the bullish conditions, while avoiding overheating in employment and a temporary dip in crude oil below $100 were achieved, the 10-year Treasury yield did not fall below 5%, and the Russell 2000 and equal-weighted index could not rebound for the week. The bullish scenario did not materialize.
The cautionary condition of the 10-year Treasury yield exceeding 5.25% became a reality, but PCE and employment did not surprise to the upside, Brent crude was at $102.25 at the weekend, and the NASDAQ was positive for the week. Therefore, there is insufficient evidence to conclude a shift to a bear market.
The biggest counter-evidence is that the hidden premise that “weak employment leads to lower long-term interest rates” has collapsed. The current evidence supports nothing more than the coexistence of high long-term interest rates and a narrow market, rather than a retreat in rate hike concerns.
Outlook for October 5–October 9
The ISM non-manufacturing index on the 5th and the September FOMC minutes on the 7th will be the focus. PepsiCo will announce earnings on the 8th, and Delta Air Lines on the 9th. I want to confirm the reality of demand and inflation from service prices, food and logistics costs, and airfares and fuel costs.
The central scenario is that even if expectations for an October rate hike recede, the 10-year Treasury yield will remain in the 5.1–5.35% range, with the NASDAQ maintaining its advantage and small-cap stocks continuing to lag.
The bullish scenario is if the ISM price index slows, the 10-year Treasury yield falls below 5.1%, and crude oil drops below $100. This would occur if the Russell 2000 and the equal-weighted index rebound simultaneously.
The cautionary scenario is if the minutes are positive toward additional rate hikes, the 10-year Treasury yield clearly exceeds 5.35%, and crude oil heads toward $105. If even large-cap tech stocks fall and the VIX exceeds 20, I would like to lower my assessment by one notch.
In terms of investment, do not chase only the highs of the NASDAQ; split new capital. It is safer to increase risk only after confirming that long-term interest rates, small-cap stocks, the equal-weighted index, and the improvement in new highs/new lows continue for two days or more.
Disclaimer
This article is a market analysis based on public information and does not recommend the buying or selling of specific financial products. The scenarios and levels described do not guarantee future results.
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