Confidence hits 12-year low, yields reach 2002 high

The major indexes went almost nowhere on Tuesday, but the day was far from quiet underneath. The S&P 500 slipped 0.16% to close at 7,671, the Dow Jones Industrial Average fell 0.25% to 51,350, and the Nasdaq Composite eased 0.09% to 26,797. The action was in bonds and in the data, where the 30-year Treasury yield climbed to 5.61%, its highest level since 2002, and consumer confidence dropped to 81.9, the weakest reading in more than 12 years and far below the 89.2 economists had expected.

Start with the bond market, because it is driving everything else right now. A Treasury yield goes up when enough investors decide to sell government bonds, which pushes the price of those bonds down and, since the interest payment is fixed, mechanically raises the return for whoever buys next. Investors are selling for three reasons at once. Oil has been expensive, hovering near $90 to $100 a barrel in recent sessions, and expensive energy feeds through into the price of almost everything, so it raises expectations of future inflation. Inflation erodes the value of a fixed interest payment stretched out over 30 years, so bondholders demand a higher yield to compensate. Second, the Federal Reserve raised its benchmark rate on September 16 to a range of 3.75% to 4%, its first increase since January 2023, and traders now put the odds of another increase at the October 28 meeting near 70%. Third, there is simply more borrowing competing for the same pool of money, as technology companies issue enormous amounts of debt to build data centers and end up bidding against the US Treasury for investor dollars.

Now the part that is worth slowing down for. Ordinarily, a terrible consumer confidence number is good for stocks, because a weak consumer means a slowing economy, which means the Fed is likelier to cut interest rates, which makes stocks more attractive. That reflex broke today. Consumer confidence measures how households feel about their finances and job prospects, and at 81.9 it is saying they feel squeezed by prices and worried about work. But because the Fed is fighting inflation rather than fighting a slowdown, weak confidence no longer buys anyone a rate cut. It just means a tired consumer and expensive money at the same time, which is why stocks drifted sideways instead of rallying. The one relief valve was oil, which fell 3.48% to $89.38 a barrel on reports of indirect talks between the United States and Iran.

One individual name deserves a mention. Fair Isaac, the company behind the FICO credit score, fell about 22% after the Federal Housing Finance Agency, the regulator overseeing Fannie Mae and Freddie Mac, said the two mortgage giants will price loans off a single grid that accepts VantageScore, a competing credit score built by the three big credit bureaus, on equal footing with FICO. Until now a lender writing a conventional mortgage had no realistic choice but to pull and pay for a FICO score.