Bonds blinked, stocks bounce but inflation won’t quit

Bonds blinked, stocks bounced (a little) but inflation keeps the heat on high.

Good morning and welcome to October.

Yesterday saw bond yields surge and then retreat as buyers stepped in, giving stocks some breathing room – but be careful, oil moved up and manufacturers reported higher costs, so, inflation concerns remain very much alive.

And all that means is you have to watch the bond market to understand what is happening in stocks. Treasuries had come under pressure overnight and then retreated only to surge again in the morning - sending the 10-year yield to 5.34% - up 6 bps before buyers stepped in and reversed the selling. By late afternoon, the yield had retreated to about 5.24% down 10 bps from top to bottom. The 2-year fell to 4.78%, while the 30-year eased to 5.61%. The action in the bond market sent stocks on a wild ride – first losing ground only to regain their footing once the bond market calmed down.

At the end of the day - the Dow gained 20 pts, the S&P added 15 pts, the Nasdaq gained 10 pts, the Russell up 9 pts, the Transports were by far the winner – gaining 222 pts or 1.15%, the Equal Weight S&P added 41 pts while the Mag 7 lost 92 pts.

The closing numbers also deserve some perspective. Advancers narrowly outnumbered decliners, yet the S&P recorded 41 new 52-week lows against just four new highs. Nasdaq recorded 287 new lows versus 41 new highs. Energy led the sectors, gaining 1.9%, while technology added 0.8%. To me, that says that while the market found its footing, there are plenty of stocks still struggling.

So, what helped turn bonds around? Well, a couple of things. Those higher yields attracted buyers and then Fed Vice Chair Philly Jefferson helped calm the market by suggesting officials may need more time before deciding on another rate hike.

In fact, he said, “My colleagues and I will need to come to our own judgment, which may take more time.”

In other words - let’s examine the data before we just move again and that gave bond investors a reason to lock in some of those bonds yielding better than 5.3% - EVEN as he warned that inflation remains too high and upside risks persist.

And that was key because Philly is NOT one of the usual suspects that goes around making comments on FED think and that helped ease expectations for another immediate move. In the end patience is a virtue, but the Fed still has to deal with an economy that remains strong while the costs of doing business refuse to settle down. Yesterday’s economic reports put that balancing act on center stage.

Start with manufacturing. September’s ISM Manufacturing PMI came in at 54.5 versus 54.6 in August, marking 9 months of consecutive expansion. And remember – 50 is the dividing line – a number north of 50 signals expansion. New orders also strengthened – coming in at 55.3 up from 53.7 and that suggests demand remains healthy.

And then came the inflation component…and here is what threw cold water on the party… ISM Prices Paid jumped to 77.9 from 71.1 – a 6.8 point jump in the index. The report showing that nearly 59% of respondents reported higher input prices, up from 46% in August. Manufacturers pointed to steel, aluminum, tariffs and petroleum products as sources of pressure.

And remember—77.9 does not mean manufacturing costs rose 77.9%. No, the report is an INDEX that measures how companies are experiencing those price increases. What matters here is that more manufacturers are paying more for the materials they need. And that creates an issue for them……. What do they do? Absorb the increase and squeeze their margins? Pass it along to customers by raising prices? Or cut costs somewhere else if possible?

And then there was construction spending and that surged in August. Construction spending rose 0.9% versus expectations for no change. Private construction increased 1.1%, residential and nonresidential spending increased, office construction rose 4.6%, power plant construction increased 0.9%. That’s pretty impressive considering the higher borrowing costs—although remember, many of these projects were financed before the latest surge in rates. But I want to keep it real…total construction spending is still 1.7% below August 2025. So yes, the monthly rebound was strong, even as the annual comparison remained weaker.

The labor reports offered another piece of the puzzle.

Weekly initial jobless claims fell to 197,000, that continues to suggest employers are reluctant to let workers go. Cont. Claims came in at 1.7 mil.

The Challenger Job Cuts for September were down 19.9% y/y. But hiring plans were the weakest for any September since 2011.

WTI rose $2.45, or 2.7%, to settle at $92.87. December Brent jumped $4.28, or 4.4%, to $102.31. Reports that China was suspending fuel exports and more US military deployments to the Middle East renewed supply concerns. Russia’s diesel export restrictions only added another layer of complication to an already tight fuel market.

This morning though, it is a different story…oil is down 4% at $89.09. News that the EU and member nations of the IEA are about to release 100 million barrels of diesel and crude into the market. This move is in direct response to Trumps demand that they release it or risk an export ban by the US.

Gold did very little…It closed at $4,178 up $20 after treasury yields eased…Leaving us in the $4,000/$4,300 trading range.

Now, today we turn our attention to the September jobs report. Expectations call for roughly 90,000 new jobs, following August’s 162,000 increase, with unemployment holding at 4.1%. Avg Hourly Earnings m/m and y/y are expected to be up 0.3% and 3.1% respectively.

A much stronger report accompanied by firmer wage growth will re-ignite the FED needs to raise rates argument. A weaker report will do the opposite and might even offer bonds some relief, while at the same time raise questions about economic momentum.

For me, the bond reaction will tell us how investors interpret the whole package. Right now – the 10 yr is down 1 bp at 5.23%.

European markets are all higher…Germany and Euro Stoxx both up 1.1%, France & Spain up 0.9% Italy up 0.8% while the UK is up 0.6%. Eurozone inflation rose to 3.8% - up from 3.2% and is now the highest since September 2023. Core inflation came in at +2.5% in line with the expectation.

US futures are UP! At 5:30 am—Dow futures are ahead by 270 pts, S&P futures are up 40, Nasdaq futures are up 260, and Russell futures are ahead by 18. Lower oil prices and some easing in Treasury yields are helping lift the mood—but the next test comes at 8:30 am with the September NFP report. That has the potential to reinforce this rally or turn it around.

The S&P closed yesterday at 7,666—up 15 pts—but the path was anything but smooth. We began the morning sitting right on top of the short-term trendline, broke below it by 10 am, and then recovered to close back above it. That recovery is encouraging—it tells us that there are plenty of buyers out there taking advantage of cheaper prices. But let’s be clear – the RSI is neither oversold nor overbot…it’s smack in the middle…so this could still go either way.

This morning’s futures suggest a stronger opening. 7,800 remains resistance. On the downside, watch the trendline. We’ll know more at 8:30 and remember, the first reaction can reverse quickly as investors dig into wages, revisions and unemployment.

Rigatoni with sweet sausage and mushrooms

Prep time: 15m

Cook time: 20m

Total time: 35m

Serves: 4-6

Ingredients

1 lb. Rigatoni

1 lb. Sweet Sausage out of the casing. Fresh sliced mushrooms.

1 lg Chopped Onion

3 Chopped Garlic Cloves.

1/2 c White Wine

3/4 c Heavy Cream, Fresh grated Parmegiana, Olive oil s&p chopped parsley.

Preparation

Step 1

Bring a large pot of salted water to a boil.

Step 2

Meanwhile, heat a splash of olive oil in a large skillet. Add the sausage, break it into pieces, and cook until browned and cooked through. Remove it to a plate.

Step 3

Add the mushrooms to the skillet and let them brown before stirring too much—you want some color. Add the onion, cook until softened, then add the garlic and cook for another minute.

Step 4

Pour in the wine, scrape up those browned bits and let it reduce by half. Return the sausage to the pan, add the cream and simmer gently for about five minutes. Season with s&p.

Step 5

Cook the rigatoni until al dente, reserving a mug of pasta water before draining. Toss the pasta into the sauce, add the Parmesan and loosen with a splash of pasta water as needed. Finish with chopped parsley.