Stocks fall as the 10-year Treasury yield reclaims 5%

By Joy Wiltermuth

'I don't think they should be raising another 25 basis points,' says a portfolio manager about the Federal Reserve's benchmark interest rate

Stocks are falling as 10-year Treasury yield reclaimed the 5% threshold Tuesday after October's hot inflation report.

It's another day of whiplash on Wall Street.

Bond yields surged and stocks slumped Tuesday after the consumer inflation report for October suggested the Federal Reserve might need to up the throttle on its inflation fight.

The consumer-price index report showed that prices across broad categories of goods and services moved higher, gaining 0.4% in October and topping the 0.3% forecast.

After the report was released, the yield on the policy-sensitive 2-year Treasury note BX:TMUBMUSD02Y shot up 20 basis points to 4.75%, as the chart below shows, putting it on track for the biggest one-day rise in two years, according to FactSet data.

That's well above the 4% level that marks the top of the Fed's short-term policy range, indicating that more interest-rate hikes could be coming.

"We are so heavily dependent on oil around the world to make and do things, it drives everything up," said Robert Pavlik, senior portfolio manager at Dakota Wealth Management, after the inflation report.

Yet talk of a half-point rate hike would be "irresponsible," because higher rates won't resolve the oil shock from the Iran war, Pavlik said. Instead, a jumbo hike would hurt consumers already facing higher borrowing and fuel costs.

"I don't think they should be raising another 25 basis points," he added.

Along with the 2-year yield, the rate on the benchmark 10-year Treasury note BX:TMUBMUSD10Y pushed 14 basis points higher to top the all-important 5% level. That level tends to weigh on stocks and increases borrowing costs for households and businesses. That's because the 10-year yield is used to price new mortgages, corporate debt and other types of borrowing.

Stocks opened lower Tuesday following the inflation report, with a broad rotation into everyday stocks hitting pause. A day before, the Dow Jones Industrial Average DJIA logged another swing of more than 1,000 points as stocks continued to gyrate in the wake of the midterm elections.

"We would be patient and disciplined about buying equities on pullbacks," Gary Schlossberg, global strategist at Wells Fargo Investment Institute, wrote in emailed comments. "We anticipate a choppier equity market going forward and would focus on higher quality equities," such as U.S. large-cap stocks in the industrials, materials and communication-services sectors, he said.

Related: Dow sees its third 1,000-point swing in four days. Why the volatility isn't over yet.

Speaking Tuesday in London, Fed governor Christopher Waller said he would recommend a half-point hike if core inflation hit 0.3% or more - which it did - because that would suggest inflation keeps moving further away from the Fed's 2% yearly inflation target.

"I understand why Waller went there," said Vincent Ahn, portfolio manage at SLW Investments. "His worry is that pass-through runs bigger and longer than expected, and today's print backs him up."

Furthermore, putting a hike of 50 basis points on the table "also does some of the tightening for them," Ahn said, adding that the 2-year Treasury yield's spike on Tuesday "is tightening the Fed did not have to deliver."

The chances of a quarter-point hike in December were above 87% on Tuesday, while the probability a jumbo half-point hike was near 13%, up from zero a day ago, according to the CME FedWatch Tool.

Still, the Fed will want to avoid overreacting to one economic data point that's backward-looking. "Oil can turn on a headline, but Brent (BRN00) is down more than 20% from its late-October high," Ahn at SLW said, noting that gas prices this week dipped back under $4 a gallon.

"The gas pump is already telling you about November," he said - adding that November's CPI report lands on Dec. 10, the morning after the Fed's next rate decision.

The S&P 500 SPX was 0.8% lower Tuesday, the Dow was off 0.6% and the Nasdaq Composite Index COMP was down 1.3%, according to FactSet.

-Joy Wiltermuth

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

11-10-26 1234ET