Stocks won back half of the November 5 drop while bond traders priced a Fed rise

The S&P 500 closed at 7,520.93 on Tuesday, November 10, recovering 49.9% of its 334.89-point loss on November 5, while the 2-year Treasury yield rose 27 basis points over the same three sessions, according to S&P Dow Jones Indices data compiled by the St. Louis Fed and Treasury.

Stocks and short-dated bonds have read the same week differently. The equity market moved on from a one-day sell-off; the bond market spent the same days pricing a Federal Reserve rate rise in December after two strong data releases.

Half of the November 5 loss came back in three sessions

The S&P 500 fell from 7,688.62 on November 4 to 7,353.73 on November 5, a drop of 4.36% (computed). It then closed at 7,376.86 on Friday, 7,549.94 on Monday and 7,520.93 on Tuesday, a gain of 2.27% from the November 5 close (computed), the FRED data show.

The Nasdaq Composite, which carries more technology stocks, fell 5.52% on November 5 and has since regained 52.8% of that loss (computed), closing at 25,065.87 on Tuesday, according to Nasdaq data on FRED. The Dow Jones Industrial Average rose 1.38% from its November 5 close (computed), to 52,231.89, according to the same source.

FinanceInTime's coverage of the next day's Asian session describes how the sell-off spread beyond Wall Street. Even after the rebound, the S&P 500 stood 2.18% below its November 4 close on Tuesday (computed).

Volatility fell back below 20

The Cboe Volatility Index (VIX), a gauge of expected swings in the S&P 500, closed at 28.18 on November 5, up from 16.61 the day before, according to Cboe data on FRED. By Monday it had fallen to 19.92, a decline of 8.26 points (computed). FRED had not yet posted Tuesday's close.

Two reports moved the short end 27 basis points

On Friday, November 6, the Bureau of Labor Statistics reported that nonfarm payrolls rose by 165,000 in October and the unemployment rate held at 4.1%. CNBC described the figure as more than double what economists had forecast. On Tuesday, the BLS reported that consumer prices rose 0.4% in October, with core prices, excluding food and energy, up 0.3%, as they had in September and August.

Over the three sessions from November 5 to November 10, the 1-year Treasury yield rose 28 basis points to 4.56% and the 2-year 27 basis points to 4.73%, while the 10-year rose 14 basis points to 4.98%, Treasury's par yield curve shows (computed). The gap between the 2-year and 10-year yields narrowed to 25 basis points from 38 (computed).

The move reversed the direction of the sell-off day itself. On November 5, as stocks fell, the 2-year yield dropped 12 basis points from 4.58% on November 4, the Treasury data show (computed), so the three sessions since took it 15 basis points above its pre-sell-off level (computed).

CNBC noted that the 2-year "closely tracks short-term Fed rate expectations." Day by day, FinanceInTime's account of Tuesday's session shows the largest single move came after the inflation report.

Futures moved from a pause to the size of the rise

Rate traders had at one point pushed the odds of the Fed holding rates in December above 30%, CoinDesk reported on Tuesday; by 9:42 a.m. ET that day, its live coverage said those odds were back to zero, with CME FedWatch showing 85% for a quarter-point rise and 15% for half a point.

Fed Governor Christopher Waller said "a 50 basis point hike in the policy rate should be considered at the December meeting," according to CNBC. Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs Asset Management, said: "A December hike is our firm base case despite wider AI jitters."

The calendar that tests both readings

The BLS is scheduled to publish October producer prices on November 13, according to its release schedule. The Treasury sells $25 billion of 30-year bonds on Thursday, November 12, according to TreasuryDirect.

The Fed's policy committee meets on December 8-9, according to the Fed's calendar, and the BLS is scheduled to publish November consumer prices on Thursday, December 10, the day after the decision.

Equities priced relief while bonds priced the Fed

We think the two markets are answering different questions. The stock rebound reads as relief that the November 5 sell-off did not spread, with the VIX back below 20; the 27-basis-point rise in the 2-year reads as a market that now expects tighter policy. Both can hold for a while, but not indefinitely: higher short-term rates raise the bar that equity valuations have to clear.

The threat is a repricing in which the December rise is followed by talk of more, as Rosner's "firm base case" and Waller's half-point comment suggest is being debated; a 10-year yield near 5% would then leave less room for equity multiples. The opportunity is that a jobs market still adding 165,000 a month supports earnings, which is what equities appear to be weighing.

We would watch the producer price report on November 13 and the 30-year auction on November 12 for signs that the bond move is spreading to the long end. Our reading would change if the 2-year yield fell back below its November 5 level of 4.46% without a drop in stocks, which would suggest the hike pricing was overdone. Single sessions are weak evidence; the next five weeks of data matter more.

The view in this final section is FinanceInTime's editorial opinion, for information only. It is not investment, tax, legal or other advice, and it does not take your circumstances into account. Forecasts are uncertain and past results do not guarantee future ones.