Watch the bond market, US stocks may be rising but so are yields.

A week ago, after the announcement of the UK trade deal, he told us, “You better go out and buy stock now,” adding that the economy would be “like a rocket ship that goes straight up.” That was the clue that a deal with China was next, and so it transpired at the beginning of this week. Trump and China agreed to materially roll back tariffs on each other’s goods for an initial 90-day period. Whether the economy will go up like a rocket ship now is debatable, but Wall Street did cheer the announcement as the S&P 500 gained around 3% on Monday. We suspected that the pain trade was higher for stocks, and so it transpired, as the losses the S&P 500 suffered at the height of the Liberation Day announcement have all but been wiped out. Once again, this proves that times of greatest fear always bring periods of greatest opportunity. Yesterday’s better-than-expected inflation print helped stoke, for some at least, the view that the Fed will cut again in June, this is despite another decent jobs report at the end of last week.

What no one in the equity market, at least at present, is apparently doing is watching what’s going on in the treasury market, as yields across the curve have been rising consistently this month. Two-year yields are now back over 4%, indicating that someone in the bond market is becoming less confident of a rate cut in June. The 10-year yield is now marginally higher than it was at the beginning of April, when the tariff announcements were made. Investors were fretting about a Liz Truss-style rerun on bonds at that point. If you assume that the S&P does make $280 a share in earnings this year, as predicted at the start of the year, that puts the S&P 500 at 21x this year, at $260 a share, closer to 23x based on last night’s close of just shy of 5900. Selling the US stock market when it looked expensive during periods of zero interest rates was often a mistake in recent years, but if yields continue to rise, at some point, it must impact stock valuations.

Yesterday, the UK economy had slightly different news, as we received the latest employment data. The unemployment rate in the UK reached 4.5% last month, and it has been steadily climbing since last summer. Average earnings remain well above the rate of inflation, at 5.6%. In effect, as was always likely to be the case due to the increase in National Insurance contributions, fewer people are receiving higher pay. Another statistic that continues to decline is the number of job openings.