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Treasury Yields Jump Before Fed Meeting, Stocks Rebound

Reuters2022-09-19

NEW YORK, Sept 19 (Reuters) - U.S. Treasury benchmark 10-year yields hit their highest in more than a decade on Monday and shares rebounded despite the message that the Federal Reserve means business tackling inflation ahead of another likely hefty interest rate hike this week.

The yield on 10-year Treasuries hit 3.518%, its highest level since April 2011. The higher rate helped strengthen the dollar and weaken gold prices as other central banks also are expected to hike rates this week.

Markets started to get the message from Fed Chairman Jerome Powell at the Jackson Hole banking symposium in August, but then investors remained in denial until it became clear inflation was stubbornly high, said George Goncalves, head of U.S. macro strategy at MUFG Securities Americas Inc in New York.

The past three Fed meetings there have been relief rallies in bonds and equities as markets interpreted Powell as being dovish. But a rally this time is unlikely when policymakers conclude a two-day meeting on Wednesday, he said.

"People are wising up to the fact that the Fed means business," he said. "The only way to contain this inflation is to get ahead of it, and they're still behind the curve. Peak hawkishness is getting closer, but we're not there yet."

Markets are fully pricing in a hike of 75 basis points, with futures showing a 20% chance of a full percentage point increase on Wednesday, according to CME's FedWatch Tool.

Markets also indicate a real chance that rates could hit 4.5% as the Fed is forced to tip the economy into a recession to subdue inflation.

The two-year yield , a barometer of future inflation expectations, climbed to a fresh almost 15-year high of 3.970%. European government bond yields also rose.

"Asset performance during this Fed tightening cycle is very different from the norm for other rate hike episodes," said David Chao, a global market strategist at Invesco.

"Usually, the Fed tightens when the economy is thriving and most assets do well. However, most assets have suffered this time, perhaps due to the surge in inflation and abrupt policy change."

Trading was thin in Britain as markets were closed in observance of the state funeral of Queen Elizabeth.

On Wall Street, the Dow Jones Industrial Average rose 0.31%, the S&P 500 gained 0.25% and the Nasdaq Composite added 0.21%.

European shares also bounced back after the broad STOXX index slid as much as 1% to a more than 10-week low, dragged down by rate-sensitive tech stocks and French shares which were hurt by the collapse of a planned merger between two TV companies.

The STOXX was last up 0.04%. Earlier in the day, Asian stocks also lost ground.

TIGHTENING TIME

It is not just in the United States that rate rises are expected. Most of the central banks meeting this week - from Switzerland to South Africa - are expected to hike, with markets split on whether the Bank of England will move by 50 or 75 basis points.

China's central bank went its own way though, and cut a repo rate by 10 basis points to support its ailing economy. Chinese blue chips still finished 0.1% lower.

The other exception is the Bank of Japan, also due to meet this week and which has shown no sign of abandoning its uber-easy yield curve policy despite the drastic slide in the yen.

The dollar rose 0.36% against the yen , having backed away from the recent 24-year peak of 144.99 in the face of increasingly strident intervention warnings from Japanese policymakers.

The dollar index rose 0.274%, with the euro down 0.18% to $0.9997.

"We expect the USD to keep trending higher this week to a new cyclical high above 110.8pts because of the deteriorating outlook for the world economy," said CBA analysts in a note.

The ascent of the dollar and yields has been a drag for gold, which was down 0.78% at $1,662 an ounce after hitting lows not seen since April 2020 last week.

Oil prices also tumbled, pressured by the stronger dollar, and subdued growth outlook. U.S. crude fell 0.55% to $84.64 per barrel and Brent was at $90.93, down 0.46% on the day.

Spot gold dropped 0.3% to $1.670,82 an ounce.

Bitcoin , which also moves in line with investors' risk appetite, hit a three-month low of $18,271 and was last down 0.45% to $19.332,00.

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

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    ·2022-09-20
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    ·2022-09-20
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      2022-09-20
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    ·2022-09-20
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      2022-09-20
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    ·2022-09-20
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      2022-09-20
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