📈 Rates' surprise rise

Interest rates are on the upswing, despite the Federal Reserve's action to move borrowing costs lower. More below.

• Plus, fresh data on the country's trade deficit — and a surprising boost to the U.S. economy from overseas tourists.

Today's newsletter, edited by Kate Marino and copy edited by Katie Lewis, is 563 words, a 2-minute read.

They say to buy the rumor and sell the news. And so it goes with the aftermath of the Federal Reserve's rate cut announced three weeks ago.

Why it matters: Paradoxically, longer-term interest rates have moved upward since the Fed slashed its policy rate, driving up mortgage rates and other consumer and business borrowing costs.

• That's partly, though not entirely, because the strong September jobs report prompted bond investors to change their tune on the likelihood of further aggressive monetary easing in the months ahead.

By the numbers: The 10-year U.S. Treasury yield reached a recent low of 3.64% on Sept. 17, the day before the Fed announced its rate cut. As of this morning, that rate is up to 4.05%.

• Moving in lockstep, the average 30-year fixed-rate mortgage was down to 6.11% on Sept. 17, per Mortgage News Daily, and yesterday was up to 6.62%.

Zoom out: The Fed controls short-term interest rates, but longer-term rates are set in global bond markets, based on investors' anticipation of what will happen to Fed policy, growth and inflation in the future.

• As such, the impact of any given central bank policy action on long-term rates is ambiguous.
• A Fed rate hike can actually cause long-term rates to fall if the smart money bets that the central bank made a mistake and is risking a recession (this happened in 2015 and again in 2018).

Between the lines: The recent moves, fueled by those good jobs numbers, are driven by a sense that the U.S. economy may be more resilient than it seemed following softer employment data over the summer.

• That implies that recession risk is more distant and this Fed rate-cutting cycle may be shallower than had seemed likely just a few weeks ago.
• The ebullience in financial markets over the last couple of months — which has increased household wealth and made the corporate borrowing environment more favorable — may signal to the Fed that it doesn't need to cut rates that much more.

Of note: With capital for corporate borrowers abundant and stock and housing prices high, "the economy might be unusually sensitive to asset prices," said St. Louis Fed president Alberto Musalem in a speech yesterday.

• That implies that if markets falter, there's a greater-than-usual risk of a downturn, or if they remain resilient, there could be a risk of inflation reigniting.

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The U.S. trade gap shrank dramatically at the end of the summer, helped by a spending surge by foreigners visiting the country.

Why it matters: That spending, considered a travel export in the arithmetic of the trade deficit, was part of an overall jump in U.S. exports, while imports actually fell.

By the numbers: The trade gap fell 11% in August to $70.4 billion. It was the biggest monthly drop since early 2023 and narrowed the trade deficit to the smallest in five months.

• Imports fell about 1%, thanks to a drop in the value of goods coming into the country, including crude oil. Industrial supplies, vehicles and auto parts saw the steepest declines.
• Exports increased 2% on the back of costlier capital and consumer goods — everything from aircraft to computer accessories — sent overseas.
• Exports of services hit an all-time high, boosted by spending by international travelers, which hit the highest level on record. Meanwhile, travel imports — that is, spending by Americans traveling abroad — also rose.

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