Stocks and bonds are out of balance. Here’s what could come next.

Put away your white clothes and your barbecues, now that summer is (unofficially) over with Labor Day in the rear-view window. Most of Wall Street’s attention is still on Friday’s jobs report, which showed a Goldilocks-like combination of a slowing labor market but not one tail-spinning into a recession.

Analysts at BMO point out the S&P 500 earnings yield — that’s earnings-to-price, rather than price-to-earnings — is now barely above the yield on the 10-year Treasury
“Declining earnings yields compared to rising Treasury rates and the risk implied by the full faith and credit of the U.S. (even after the downgrade), begs the question of how long this dynamic can persist before returning to more historically typical levels either via higher earnings yields or lower 10-year yields,” they say.

The initial price action on Tuesday is pointing toward the former — if stocks fall, the earnings yield rises — but for the call of the day, we’ll head to the team at UBS, who say they are bullish on bonds. (The BMO team is as well; they’re targeting the mid-August low in the 10-year of 3.95%.)

“Recent volatility in U.S. rates has raised the question of whether we are on the verge of a bear market for bonds. We do not share this view and think nominal yields will fall over our six- to 12-month forecast horizon for a number of reason,” say the UBS team led by Mark Haefele, global wealth management chief investment officer.

First, they point to Jerome Powell and crew over at the Federal Reserve, and say monetary policy is restrictive. They note that inflation-adjusted interest rates are now positive, at levels not seen since the 2008 financial crisis, and mortgage and credit card rates are at multi-decade highs.

Next they say inflation is falling and will continue to do so. Housing inflation — though reflected in official numbers with a lag — is cooling, and goods inflation was negative in July.

The UBS team add expectations for where rates will end up hasn’t changed very much. “We do not believe the U.S. Treasury market has lost its safe-haven appeal, and it will likely continue to attract capital. There has also not been a material repricing higher of terminal policy rate expectations, indicating the market believes the Fed is close to the end of hikes,” they say.

Finally, they say, the recent recalibration of the Bank of Japan’s yield-curve control wasn’t the start of a larger move higher in global term rates. “The move in the 10-year Japanese government bond yield since the announcement is less than 20bps and we believe the BoJ places much weight on financial stability, so any policy adjustments are likely to be done in a controlled fashion,” they add.

They see the best opportunities in the 5-to-10 duration segment in government bonds, investment-grade corporate bonds and sustainable bonds.

The market

U.S. stock futures


were a bit weaker as the yield on the 10-year Treasury

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The buzz

Struggling China property giant Country Garden made two overdue bond payments before the end of a 30-day grace period.

Microchip designer ARM Holdings said it’s seeking to price its initial public offering between $47 and $51 per share, raising up to $4.9 billion.

It’s the dregs of earnings season, with
Smith & Wesson

and Kroger

among the companies reporting results this week.


and Blackstone

are set to join the S&P 500, as Lincoln National

and Newell Brands

get removed.

Goldman Sachs economists say the chance of a U.S. recession is now just 15%.

Weight-loss drug maker Novo Nordisk
which overtook LVMH to become Europe’s most valuable company, launched its Wegovy weight-loss drug in the U.K.

Best of the web

Revision whiplash: How to track underlying payrolls growth better.

Huawei teardown shows chip breakthrough in blow to U.S. sanctions.

The Culinary Union, Nevada’s biggest, may strike over AI bartenders in Las Vegas.

Top tickers

Here were the most active stock-market tickers as of 6 a.m. Eastern.


Security name


AMC Entertainment





Mullen Automotive

T2 Biosystems

Palantir Technologies


The chart

Student-loan repayments have already started to spike, ahead of the official October ending of the federal moratorium. In fact, payments to the Department of Education have already surged to a level before the payment pause began, points out Goldman Sachs analyst Alec Phillips. He says what is likely going on is that a small group of borrowers are paying down principal on their loans. The broader economic impact, he says, will hit in the fourth quarter.

Random reads

The exodus from the muddy Burning Man festival is underway. (Honestly it doesn’t sound like the catastrophe that was either hoped/feared.)

A schooner’s 142-year-old remains were just discovered in Lake Michigan.

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