Previously, there was a massive selling spree in the US stock and bond markets, causing market sentiment to drop significantly. However, since the end of October, the continuous decline in US stocks and bonds seemed to have stopped possibly due to dovish signals released by multiple sources of US economic data. As of November 14th, the 10-year US Treasury yield has fallen 55 basis points from its recent high of 4.99 to 4.44%, and the US Dollar Index has fallen to 104.08.

As US bond yields and the US dollar both declined, the stock market had its best weekly performance in 2023. A report by Goldman Sachs revealed that during the week ending November 5th, hedge funds worldwide ramped up their purchases of US stocks at an unprecedented pace. Hedge funds held long positions in information technology at their highest level in eight months.

Despite weak economic data, the US stock and bond markets appear to be surging. This may be because the US market is following a main trend: weak economy leads to relaxed tightening policies, leading to a rising market.

As the US economy has shown resilience and inflation remains above 2%, it has opened up the possibility for the Federal Reserve to raise interest rates. However, if economic data shows a slowdown in the US economy, it is likely that the Federal Reserve will remain inactive and not raise interest rates. Therefore, it could be argued that the market may be somewhat more receptive to an economic slowdown. Some investors may view poor economic data as potentially leading to higher returns in the stock and bond markets.

Recently, a variety of US economic data has been released intensively. Let's take a look at how these economic indicators may have impacted the market.

1. the FOMC decided not to raise interest rates

This year, the FOMC (Federal Open Market Committee) has already raised interest rates four times at its meetings. However, November 1st was the second meeting since September where the rate remained unchanged.

As of November 7th CME Group estimates, the probability of a 25 basis point rate hike by the Federal Reserve in December is only 15%. This suggests that the market believes the rate hike cycle is likely over and expects the Federal Reserve to cut interest rates next year.

Although the economy remains strong despite the substantial rate hikes, almost all Fed officials remain cautious in their comments on monetary policy. The post-meeting statement indicated that this may prompt the Fed to take a long-term tightening stance. The “higher-for-longer” mantra has become a central theme for where the Fed is headed.

2. The non-farm payroll report was below expectations

On November 3rd, the non-farm payroll report showed that the number of non-farm jobs in the US increased by 150,000 in October, lower than market expectations. This was due in part to a strike in the automobile industry which affected manufacturing employment and resulted in significant declines in service industry employment. The unemployment rate also rose to the highest level since January 2022 at 3.9%.

FXStreet analyst Yohay Elam said that the cooling of the labor market provides further data support for the Fed to pause the rate hike. For the stock market, this is a good scenario - the economy is not too hot to trigger a rate hike, nor too cold to lead to profit cuts.

The non-farm payroll data triggered another large-scale buying spree in bonds, pushing market rates down. The 2-year yield slid by more than 13 basis points to 4.841%, and the 10-year yield fell by 9 basis points to 4.577%.

3. Lower-than-expected bond auction by the Treasury Department

On October 30th, the US Treasury Department released its fourth-quarter US government bond auction plan which planned to add $776 billion in financing, lower than market expectations. Treasury yields immediately slid following the announcement but soon began to bounce back.

Bond issuances are important for two reasons. Firstly, high interest rates increase borrowing costs, adding pressure to US debt. When the Treasury Department announced a borrowing demand of $277 billion more than expected in the third quarter, it raised concerns in the bond market and yields soared. However, this time, due to October's tax revenues exceeding expectations, the fourth-quarter budget was $76 billion less than the Treasury Department's August estimate. The lower-than-expected bond issuance in such a turbulent period of the global bond market seems to have boosted investor confidence.

Secondly, excessive government bond auctions can lead to oversupply in the secondary market. When the Treasury Department issues more bonds, it usually leads to a drop in bond prices and pushes up yields, as the increased supply of bonds exceeds the demand.

4. PMI indicators lower than previous values

In October, the US ISM (Institute for Supply Management) manufacturing and non-manufacturing PMIs recorded 46.7% and 51.8%, respectively, both lower than their previous values.

Of note is that the leading economic indicator - the manufacturing PMI has been below the 50% breakeven line for 12 consecutive months. After showing signs of improvement in previous months, the UAW strike against the three major automakers may have led to a decline in new orders and employment, resulting in a significant contraction of the PMI.

In contrast, the economic activity of the service industry's PMI has been expanding for 10 consecutive months. However, looking at the sub-indices, the business activity index was 54.1% in October, a significant decrease compared to 58.8% in September.

Anthony Nieves, chairman of the ISM Non-Manufacturing Business Survey Committee, believes that the service industry continues to slow down.

Some may wonder if economic data continuously slowing down could cause the stock market to continue to rise.

Despite investors recently celebrating survey data and other indicators, analysts are cautious about the current trend of the stock market. According to Marko Kolanovic, Chief Market Strategist at JPMorgan, the market still faces significant challenges, including potential actions that the Federal Reserve may take, which may cause the stock market to decline in the fourth quarter. The market's driving force of "bad news is good news" is actually full of risks beyond a certain narrow range. The risks that economic slowdown brings to the stock market may begin to outweigh its potential benefits.

The economy has two sides. High-interest rates have dealt a heavy blow to credit as borrowing costs remain high. Interest rate-sensitive industries, such as the US housing market and car loans, are likely to have a tough time. These conditions are likely to be extremely unfavorable for those who want to buy houses or cars.

Investors should remain cautious about the potential risks in the market.

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