Since October last year, the U.S. stock market has been driven more by the secular power of the AI trade than the macroeconomics. This is most clearly seen in the way stocks have responded to drastic changes in the outlook for Federal Reserve policy, which was at one point expected to deliver half-a-dozen interest-rate cuts in 2024. As none of that materialized, equities kept making new highs. Clearly, the Fed, the bond market, currencies, and everything connected to the macro has ranked second to the big-tech themes.

As of right now, it looks like the Presidential election in November ranks third. It's natural that investors are starting to speculate on what will happen and what it will mean for the market, but the past two weeks of trading in the bond market make it pretty clear that inflation and the economy are still the driving force for yields and the dollar.

The most notable thing that's happened in bonds the past two weeks is a steepening of the yield curve. It started around PCE on June 28, when bonds initially rallied but then turned around and sold off until the 10-year yield neared 4.5%. Rates have turned around again since, with the 10-year now below 4.3%. The net move in the 10-year over these 10 trading days has been basically null, but the 2-year yield has been in a steady decline, from a two-week high of 4.77% down to 4.56%. This is called a bull steepener, because the short end interest rates came down faster than the long end.

Some have argued this reflects the market pricing in an election outcome that means fiscal stimulus, but that's likely not the case. If the market were thinking that way, we would be getting bear steepening by way of long yields rising faster due to higher economic growth or additional term premium related to deficit spending. Instead, the bull steepening speaks more to the deterioration in economic data that is heightening the odds of a Fed cut again.

One way to test this thesis is to watch bond auctions in the 10 and 30-year the next two days -- if I'm right, they should go smoothly.

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