Key Highlights
● The 10-year Treasury Yield is near its highest level since 2007, the 30-year is at its highest since 2004, and the 5-year has broken to levels not seen since before the financial crisis.
● The Federal Reserve raised rates on September 16 in a unanimous 12-0 vote and now points to one more hike this year, with markets pricing roughly two-in-three odds of a move at the October 27-28 meeting.
● Homebuilders D.R. Horton, PulteGroup and KB Home are absorbing the brunt of higher Mortgage rates, while small caps on the Russell 2000 lag the S&P 500 and Nasdaq.

Stocks shrugged off a bond selloff last week, but bond traders are not letting Wall Street forget it. The 10-year Treasury yield is hovering near its highest level since 2007, the 30-year yield has climbed to its highest since 2004, and the 5-year has broken to levels not seen since before the financial crisis. With a packed economic calendar ahead, the Bond Market may decide whether stocks can hold near their highs.

BlackRock's CIO captured the mood, calling the selloff more of an eye-opener than a crisis, while still stressing it is something worth watching closely.

A Fed that is hiking again

The backdrop is a Federal Reserve that has shifted into reverse. On September 16 the Fed raised rates for the first time since 2023, in a unanimous 12-0 vote, and its projections point to one more hike this year. Chair Kevin Warsh was blunt: "Inflation is too high and has been for too long."

Markets now put roughly two-in-three odds on another hike at the October 27-28 meeting. That is why every data point this week matters, and why a busy line-up of Fed speakers, including Austan Goolsbee, John Williams, Tom Barkin, Lisa Cook, Neel Kashkari and Lorie Logan, will be watched closely for hints.

Fiscal worries are adding fuel. Fortune notes that US Debt has reached about $40 trillion, annual interest costs are around $1 trillion, and the Congressional Budget Office's February forecast for the 10-year yield already looks out of date.

The calendar that could move everything

Monday brings the Dallas Fed Manufacturing survey. Tuesday has JOLTS job openings, Conference Board consumer confidence and Case-Shiller home prices. Wednesday, the last day of the quarter, is the big one: August PCE inflation, the Fed's preferred gauge, arrives alongside Personal Income and spending, the third estimate of second-quarter GDP, ADP private payrolls and the Chicago PMI.

Thursday brings Challenger job cuts, weekly jobless claims and ISM manufacturing. Then comes Friday's September jobs report, where economists expect payrolls to grow by about 100,000 after August's 162,000 and the Unemployment rate to tick higher. A hot Inflation reading followed by a strong jobs number could all but lock in an October hike. A softer set of numbers might be the market's best-case scenario.

Consumers are already feeling the strain. The University of Michigan's sentiment index fell to 48.1 in September, a four-month low. At least there is no shutdown drama: funding runs to December 11.

Where the pressure shows up in stocks

Housing is the most direct casualty. Mortgage rates have climbed to a one-year high, weighing on homebuilders D.R. Horton (NYSE:DHI), PulteGroup (NYSE:PHM) and KB Home (NYSE:KBH), whose orders and Revenue fell even as Earnings beat. Lenders Rocket Companies (NYSE:RKT) and UWM Holdings (NYSE:UWMC) have slid too. The exception is Lennar (NYSE:LEN), which is getting support from Berkshire Hathaway's continued buying.

Small caps feel higher borrowing costs more than megacaps do. The Russell 2000 closed Friday at 2,837.55, down for the week and well below where it started the quarter, even as the S&P 500 and Nasdaq gained. Utilities on the Dow Jones Utility Average, often treated as bond substitutes, are caught between rising yields and booming AI power demand. Banks, meanwhile, get fatter lending margins but face fears of more hikes and AI disruption. Wells Fargo's analyst cut estimates on Goldman Sachs (NYSE:GS) last week.

What to watch today

The VIX closed Friday at just 14.87, so stock traders are far calmer than bond traders. Watch the 10-year yield at the open, especially with oil rising again on the Iran standoff. Also watch whether rate-sensitive groups like homebuilders and small caps can hold their ground. History offers some comfort: in midterm election years, October has typically been the S&P 500's best month. But this week, the bond market holds the key.