The US job and real estate markets also improved dramatically with jobless claims now reaching post crisis low while US existing home inventory is at 2005 levels.
On a theoretical basis, while global central banks are continuing to implement very accommodative monetary policies, financial markets should continue to reprice the improving growth environment in US curve (not to mention the potential impact of the FED reducing its pace or mix of credit instrument buying). A simplistic historical comparison between industrial production level, GDP growth and jobless claim level and the US yield curve shows that 10yrs rates should be closer to 3.5% rather than 2.85% as they are trading now.
In a more factual manner, US equities just experienced a 8-9% rally in two months on the back of reassuring FED speech about QE reduction, positive macro data and stabilizing rates (10yrs rates consolidated at around 2.6% after June move). US equities are now in a trending range as investors are looking for clue to see where the next marginal change (up or down) will occur : eco growth or financial conditions ?
Unless we witness a large deterioration in US growth data, US yield curve should continue to steepen in sympathy with the current price action. As usual : price action inertia backed by marginal change in key contextual macro data. As such, unless growth surprise significantly to the upside, the sensibility of US equities to US yield curve steepening should increase significantly in the month to come. The debate of US debt ceiling in Sep/Oct could also exacerbate price action movements. US rates are therefore the main risk factor to follow currently for US equities and to a lesser extent for risk on a global basis (if large move in yield level).
Overall, US 10yrs yield appears poised to reset its upward trend while US equities should grind lower so that investors can take the "rate risk" at cheaper levels.
