[Bummp]

More recently, the lead seems to have switched, with the bond market now taking the lead in the macroeconomic tango, particularly in the US where the bond market sell-off has gathered steam. This selloff initially pushed bonds “ahead” of the equity market in terms of economic optimism. And even more recently, the rise in yields has caused equity markets to pull back a touch, although the digestion of record levels of new equity issuance has also been a factor.

Over the past three weeks or so, the selloff in 10 year US treasuries gathered momentum, and yields have moved 60bp higher.

It is not unreasonable that rising bond yields impinge on equity performance. After all higher yields are transmitted to the rest of the economy through increases in interest rates on household and corporate borrowing. But what matters for equities at least as much is why bond yields are rising – if the source of the shock is a positive growth re-rating as was the case earlier in the spring, equities can rally alongside, and this should be relatively neutral for financial conditions overall. On the other hand, if concerns about fiscal and central bank credibility and inflation drive yields higher rather than better growth expectations, as seems to be the case in recent days, then this is a much less constructive
mix.

But some think such inflation concerns are overdone given the forward view of a tepid recovery in advanced economies.The ongoing rebalancing in savings between the private and public sectors should mean that bonds remain well bid in the medium term. If bond yields do compress in line with these expectations, what will matter more for equities in coming days is whether the ongoing cyclical stabilization gathers pace or stalls. More than ever, therefore, we remain focussed on ‘Data Monday’, which will bring several top-tier pieces of information in this regard – the ISM survey and personal spending data in the US, China PMI, and Eurozone and UK PMIs.