What the bond market signals

Here with me now is Steve Sosnick. He's the chief strategist at Interactive Brokers. CNBC senior economic reporter Steve Leesman joins us as well. It's great to have both the Steves here to kick things off on this Monday. And Steve Sosnick, there's a lot of people going, once things get this extreme, how many more days are rates gonna go up? How much higher can the dollar get? But you say it all depends on what happens next week. I really do, because the momentum clearly is stronger dollar, higher rates right now. But we're gonna learn a lot, basically literally one week from now when President-elect Trump becomes President Trump. And we see whether these executive orders that I think have got the market a bit fearful about the inflationary impacts of tariffs and potential immigration restrictions. Let's see if the market is sort of overpricing the negative here. It sort of would be an inverse of buy the rumor, sell the news, if they turn out to be less extreme than the market fears. Of course, if they are as consequential, well, then this trend can continue. Can you kind of unpack a little bit this dynamic where we have both high and rising bond yields and a rising dollar? And I might even throw in rising commodities, but you could argue there's some idiosyncratic things with Russia going on there. But which is driving which higher? Or are they all being driven by the same news flow? Pretty similar. I mean, in general, if you have higher rates in the US or higher rates in any currency, it generally helps appreciate that currency because you earn more interest by owning that currency. In this case also, we got a little bit of a kick on Friday because we learned that the economy, the labor economy is stronger than we expected. We shouldn't be expecting rate cuts anytime soon necessarily. And that freaked out the stock market to a large extent. The bond market reacted pretty much as it might have. But as you take the rate cut expectations off the table, well, then the dollar seems stronger against other currencies where you have central banks who are more likely to cut rates, such as the ECB or the Bank of England. It feels like the bond market remains in the driver's seat this year. So I don't know what that portends for stocks. If it, how do you kind of explain the path that we might take throughout all of this? It depends why the bond markets, why the bond yields are rising. If they're rising because the economy is stronger, well, then that's pretty good and stocks can actually be resilient under that circumstance. There are plenty of situations where stocks and bonds can diverge for a while. You just, you know, Dominic just mentioned that November, 2023 was a previous high for the bond market. Stocks did pretty well throughout 2023. But again, if the economic story is good, well, they can diverge in that way. Yields can go up and the stock market can be okay. If it's because of inflation fears, if it's because of some sort of stagflation, you know, all the negatives, and if the dollar gets sort of too strong so that multinational exporters, the ones that dominate major U.S. indices, get their earnings impacted, that becomes problematic. That's where it's very dynamic. And maybe, I mean, how telling is, and then I'm gonna bring in Steve to answer that question you just raised, but the VIX being above 20 now and kind of sitting up there, does that tell you there could be more near-term downside? Yes and no. Well, remember, VIX, I always like to say, VIX is not a fear gauge, but it plays one on TV. It's not constructed as a fear gauge. It's meant as the market's best estimate of volatility over the coming 30 days. We just said that there's a lot of potential news coming down over the coming 30 days. Also, there is a backwards-looking element to VIX. And over the 15 sessions prior to today, eight of them had moves of the S&P 500 greater than 1%. So we are- We have realized volatility. We are actually seeing some volatility, and that's getting priced in a bit. Okay, so Steve Leisman, maybe you can answer that question for the bond investors out there. Is this a stronger economy, or is it because of tariffs, deficit issues, and the like? Well, I think it's all those things. And I love the way Steve is thinking about this. It kind of forced my thinking, which is, why are rates higher, and what could potentially change? So I made a list, Kelly, and maybe we can all add to this list. Okay, let's start off with the high deficits that could grow bigger. This is indeed something that President-elect Trump could do something about, but I think it's unlikely. Moving on to the next thing, better growth and productivity outlooks. The second, I don't think anybody has anything to do with the productivity part of this thing, but better growth, that does look to be part of what the market is bracing for when it comes to an outlook for higher interest rates right now. Then there's inflation. Well, that's the Fed's purview. And we'll see if the Fed decides to do more about inflation or just stays where it's at and thinks it will drive down inflation that way. And then there's the uncertainty aspect of all of those things. And I think Steve is right to think that come inauguration day, we might get a little more certainty about, or at least in the weeks after that, we'll get a little more certainty about what President-elect Trump plans. But right now, I think there's an idea out there that I'm gonna sell the 10-year amid that uncertainty rather than buy it. And you're right, I think, Kelly, in this notion that the higher dollar, I think, should attract funds to our deficit financing. And that should be something that helps over the long haul. But overall, my conclusion is there's not a whole lot, really, that reverses course here unless President Trump steps forward with what I think would be something of a serious effort to reduce the deficit.