Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

U.S. stocks fell on Wednesday, as a Reuters report that the US is considering curbs on a wide range of exports to China ratcheted up US-Sino trade war fears and added to the gloom surrounding Netflix's earnings miss.

More on that below. In my column today, I look at what is driving U.S. Treasury yields lower. In short, investors are all in on Fed Chair Jerome Powell's view that employment risks trump inflation risks. 

I’d love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

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* U.S.-Asian heavyweights trade talks heat up

U.S. Trade Representative Jamieson Greer and Treasury Secretary Scott Bessent head to Malaysia to meet Chinese officials, with the US-Sino trade war at an extremely delicate phase, especially after Reuters's exclusive report on potential U.S. controls on exports to China. Will Presidents Trump and Xi meet face to face in South Korea next week?  

Meanwhile, Japan's government led by new prime minister Sanae Takaichi is finalizing a purchase package, including U.S. pickups, soybeans and gas, to present to Trump when he visits Japan next week. And India is reported to be close to agreeing a deal to slash US tariffs on Indian imports to 15%-16% from 50%. 

* U.S. Big Tech's legal clouds

Netflix on Tuesday blamed its Q3 profit miss on a $619 million charge linked to a tax dispute in Brazil, and on Wednesday Apple was hit with a complaint to EU antitrust regulators by two civil rights groups over the terms and conditions of its App Store and devices. 

This could pose another headache for Apple, which was fined 500 million euros in April. The sums for both companies aren't cripplingly large, but they aren't helpful, and shares in both underperformed the broader market on Wednesday. 

* Earnings power

The U.S. third quarter earnings season is going up through the gears, with around 90 companies in the S&P 500 reporting this week and some 180 next week. So far, around 87% have reported 'beats', running well above the average over the last 30 years of around 67%.

As ever, there have been some standout beats and misses. Netflix's shares plunged 10% on Wednesday after its miss, enough to drag the broader market lower even before the latest US-China trade twist. With benchmark indices still near all-time highs, are they more vulnerable to misses than beats?

The slide in Treasury yields in the face of record-high stock prices, tight credit spreads, and sticky inflation suggests investors have accepted Federal Reserve Chair Jerome Powell's steer that policy is being driven by employment, not inflation. 

So much so, there's a risk that a self-sustaining feedback loop takes hold, whereby labor market concerns depress yields, exacerbating fears that the economy is slowing, which could, in turn, maintain the downward pressure on yields. 

Investors, starved of official economic data during the three-week-long government shutdown, get one rare bit of guidance on Friday, CPI inflation. The trouble is, it's not the data they want.

Friday's report is expected to show that core annual inflation held steady at 3.1% in September. That's more than a percentage point above the Fed's 2% target. Annual core CPI has been 3% or higher almost every month for nearly five years. 

The bond market is likely to greet this with a shrug. The two-year Treasury yield last week fell to its lowest point since August 2022, reflecting investors' belief that the Fed will cut interest rates again next week, in December, and into next year. The 10-year yield is now below 4.00%, clocking its lowest daily closing level in more than a year on Tuesday.

So even if inflation comes in on the firm side, this is unlikely to spark a jump in yields.