Global bond selloff
Yields are spiking worldwide, hitting multi-decade highs in Germany, France, and Japan. The drivers are heavy government defense spending, wider fiscal worries, and a wave of AI-related corporate bond issuance. Higher rates raise borrowing costs and pull capital away from stocks, which competes with growth stocks in particular.
Banks are the clear winners. Lenders in both Europe and Japan are up strongly this year on higher yields and a steeper yield curve (long-term rates rising faster than short-term ones widens their lending margins).
Japan
Japan is one of the best-performing developed markets, even with worries about the JGB (Japanese government bond) market and an economy that is just muddling along. Second-quarter GDP came in weaker than expected; the GDP deflator (a broad price measure) came in higher than expected. Tech stocks there show strong earnings growth, and banks are doing well.
The weak yen lifts exporter earnings but cuts returns for U.S. investors holding Japanese assets. Currency intervention has slowed the yen's slide but not stopped it. Ending the weakness needs a real policy change, which is unlikely unless the Bank of Japan speeds up rate hikes sharply or the government cuts fiscal spending. Dollar-yen trades at 159, giving back some post-intervention gains.
The broader Topix index keeps hitting records. Money has rotated back into Japan and South Korea after China had its moment.
U.S. yields: creep, not spike
For the U.S., the yield move over recent months is a slow creep higher, not a sharp spike. The 30-year Treasury yield is at its highest since 2007. The U.S. 10-year is not at the extreme levels seen abroad.
What matters most for stocks is the rate of change in yields, not just the level. Levels matter over time, but how you reach a given level matters more for market performance. Bond yields and stock prices still hold a negative relationship and negative correlation. Past rupture periods - late 2022, late 2023 and others - all involved yields jumping fast and pushing stocks down.
S&P 500 breadth is net positive today even though big tech is causing a large distortion. The favorable reaction comes not from yields rising but from the move being mild today and far less aggressive over recent months than in those earlier ruptures.
China's tech paradox
China's domestic economy is weak. Retail sales grew just 0.6% in July. Real estate investment is falling, down 19% year-over-year. Exports are strong, up over 20% year-over-year, and the tech companies tied to the AI capex boom are the ones benefiting.
Chinese companies have not turned tech progress into earnings progress yet. There are early signs of stabilizing. Chinese stocks bounced on hope that the internet giants can use AI investments to cut costs and lift revenue. Earnings estimates for the MSCI China index rose this month for the first time in 17 months. Stronger earnings are still needed for a better outlook. Alibaba (BABA) reports next this week.
U.S. data
This morning's data ran opposite to July's "false positives." In July, headline retail sales and non-farm payrolls looked negative but the details underneath were not bad. Now the reverse: pending home sales look poor, but housing has been in its own recession for years, almost the whole post-pandemic cycle, so it is out of sync with the wider economy.
Industrial production is holding up with little drama, still boosted by AI investment - manufacturing is the bright spot. Import prices are the problem this morning, with core import prices up 4.5% year-over-year, strong versus history, concentrated in capital goods brought in for AI. That inflation pressure is not receding and keeps pushing inflation up in the AI space. It is not enough to derail the broader economic expansion, largely because housing has been out of sync for four or five years.
This poses a balancing problem for the Fed chair: a struggling housing market against the path of rates ahead.
