In most market environments, rising Treasury yields are correlated with higher stock prices. This is because when investors get more optimistic about growth prospects, they sell bonds and buy stocks.

Of course, this relationship can dramatically change depending on the circumstances. For most of the past decade, we've had rising stock prices and falling yields due to the Federal Reserve's low rate policy and purchase of Treasuries. And over the past year, yields and stocks have had an inverse relationship due to inflation and a hawkish Fed being the primary threat to the stock market.

This is dramatically illustrated in early August when the 10-year yield was at 2.6% and the S&P 500 (SPY  ) was at 4,300. Since then, the 10Y yield has risen to 3.5%, while the S&P 500 is around 3,900. There was a similar move in the 2Y note which went from 2.9% to 3.9%.

This is notable in 2 ways. One is that the curve is inverted which means the market's base case is now a recession. The second is that we exceeded the previous cycle high in terms of yields and are now back to 2011 levels.

The major factor in the dramatic rise in yields has been the strong inflation numbers as evidenced by the August CPI which showed prices rising more than expected especially when looking at the Fed's preferred measure - monthly core CPI.

In fact, this is showing a broadening of inflationary pressures which is more than enough to offset the deflation from lower gasoline and used vehicle prices which were down 12% and 4% compared to last month, respectively. Now, we are seeing stickier components with accelerating inflation in categories like services, healthcare, and rents.

In general, it's never a good idea to overreact to a singular data point. However, this is an exception to the rule as it likely increases the duration of the current Fed hiking cycle by a minimum of 3 months and it increases the peak, terminal rate by at least 100 basis points. Further, the strong inflation report also eliminated hopes that we would see an inverted-V-type situation in inflation.

Rather, this is the worst-case situation, and it means the Fed is going to have to give more medicine to the market which will have all types of nasty, side effects.