We went into the Thanksgiving holiday with the U.S. 10-year yield testing the important 4% level.
In our last note, we discussed a clean break below 4% as a potential tailwind for financial conditions — and a catalyst for the long-awaited narrowing of the performance gap between mega-cap tech and the rest of the market.
Historically, small caps tend to do better as policy moves from tight to easier.
But despite the Fed’s current policy direction, the gap is still wide: the Nasdaq is up about 21% YTD versus 12% for the Russell 2000 (and only 9% for the equal-weight S&P).
That brings us to this week. Yields are bouncing, not breaking lower. And it’s not just the U.S. The move UP is global, and it’s being led by Japan.
Overnight, Bank of Japan Governor (Ueda) signaled the BOJ may resume rate hikes at the December 19 meeting. With Japan still at near-zero rates, even small tightening matters, because Japan has been the world’s last major source of ultra-cheap money.
As that liquidity backstop fades, global yields can rise.
On the policy path note, over the next three weeks we’ll hear from every major central bank.
As you can see below, most of the developed world is still in an easing posture — Japan remains the outlier, moving in the opposite direction.
Add to all of this, today also marks the official end of the Fed’s quantitative tightening (QT) campaign. That means the Fed will now be watching liquidity conditions closely for the cue to pivot back toward balance sheet expansion again. And if we listen to FOMC Vice Chair, John Williams, it will be “soon.”
So, bottom line: Despite the pop in global yields today, the Fed is set to deliver the fuel for stocks — another rate cut on December 10th plus balance sheet expansion coming “soon.”