US stock market pushes 10-year yields up 100bps despite Fed rate cuts

The U.S. stock market seems determined to defy the Federal Reserve. While the Fed has cut interest rates by a total of 100 basis points since September, the yield on the 10-year Treasury note skyrocketed by the exact same amount.

Yields now sit at 4.60%, up from 3.60%, defying the Fed’s efforts and leaving analysts scratching their heads. This is the sharpest disconnect between market moves and Fed policy in history. The 10-year yield is now at its highest since May, proving once again that rate cuts don’t always mean lower borrowing costs.

And borrowers are feeling it. Mortgage rates on a 30-year loan have climbed to 7.10%, up from 6.15% just three months ago. For the average home priced at $420,400, that’s an extra $400 a month out of buyers’ wallets.

Inflation hits hard, markets don’t care

If you’re wondering why the Fed’s rate cuts aren’t bringing yields down, the answer is simple: inflation is back. The 3-month annualized core CPI is inching closer to 4%, with PCE, PPI, and CPI data all showing a steady rise. And that’s before considering any future tariffs or tax cuts.

At the November Fed meeting, when asked about this market disconnect, Chair Jerome Powell said, “It’s material changes in financial conditions that last… and we don’t know that about this.” Well, six weeks later, and the 10-year yield just keeps climbing.

Adding fuel to the fire, the U.S. Dollar Index (DXY) hit a 25-month high, jumping nearly 8% since October. One dollar now fetches $1.44 Canadian, a level not seen in two decades.

Inflation’s grip is tightening everywhere, but the bond market is laser-focused on one metric: Supercore PCE inflation. Annualized one-month Supercore PCE inflation is nearing 5%, and the headline number is back above 3.5%.

A chaotic road to 2025

With inflation running hotter than expected, expectations for 2025 are changing fast. Just a few months ago, markets anticipated four rate cuts for the year. Now, they’re penciling in just two—and there’s a 21% chance the Fed won’t cut rates at all.

The first cut isn’t even on the radar until May 2025, which feels like a lifetime away. Meanwhile, the stock market is on a spending spree. Since Election Day, a record $140 billion has flowed into U.S. equities.

Foreign and domestic investors are doubling down despite inflation warnings and a paring back of the Fed’s pivot. If this sounds reckless, it’s because it probably is.

Labor market data is adding to the chaos. Weekly jobless claims hit 219,000 for the week ending December 21, just shy of the previous period and below the 225,000 forecast. But here’s the thing: continuing claims, which lag by a week, climbed to 1.91 million, the highest level since November 2021.

The Fed, for its part, isn’t backing down on its cautious outlook. Powell said, “It’s kind of common sense thinking that when the path is uncertain you go a little bit slower. It’s not unlike driving on a foggy night or walking into a dark room full of furniture. You just slow down.”