Treasury yields rose on the eve of the Federal Reserve decision, with traders betting interest rates will be higher for longer to prevent an inflation flare-up. Oil wavered after Brent briefly topped $95 a barrel.
(Bloomberg) — Treasury yields rose on the eve of the Federal Reserve decision, with traders betting interest rates will be higher for longer to prevent an inflation flare-up. Oil wavered after Brent briefly topped $95 a barrel.
Ten-year US yields hovered near the highest since 2007 amid speculation the Fed will deliver a hawkish hold Wednesday. The S&P 500 came well off session lows, led by gains in some megacaps like Tesla Inc. and Apple Inc. Online grocery delivery business Instacart surged as much as 43% in its debut. Walt Disney Co. slid on plans to nearly double its theme-park spending to $60 billion over the next 10 years.
Read: GLOBAL INSIGHT: $100 Oil? What It Means for Fed, ECB, BOE Rates
Fed Chair Jerome Powell and his colleagues are widely expected to hold rates steady Wednesday. Still, supply shocks such as climbing oil prices present the central bank with a quandary as they simultaneously boost inflation and curb economic growth. Surging energy costs played a role in tipping the US into recession in the mid-1970s, as well as the early 1980s and 1990s.
“The risks for headline inflation to heat up over the next couple of months are rising and that should complicate what the Fed does,” said Ed Moya, senior market analyst for the Americas at Oanda. “Do policymakers become convinced that despite a resilient labor market, pricing pressures will continue to ease? If core inflation shows it is struggling to continue to drop, the higher-for-longer rate regime will last a lot longer than the market is pricing in.”
In fact, after pricing in a “peak” in interest rates in November, trader bets have recently shifted out to December — suggesting that perhaps the market is giving credence to signals of a more pronounced central bank pause, according to Christopher Jacobson at Susquehanna International Group.
Read: Do You Dot Plot? Understanding How the Fed Forecasts: QuickTake
Investors are keenly focused on Fed officials’ updated quarterly rate projections — known as the dot plot — that will be released Wednesday at the conclusion of the policy meeting. High on the watchlist will be whether these forecasts continue to reveal a median view for one more quarter-point hike this year and whether forecasts for 2024 scale back the 100 basis points of rate reductions that officials foresaw in June.
To Fawad Razaqzada at City Index and FOREX.com, should the Fed revise the 2024 median plot to indicate fewer rate cuts than previously projected, that would discourage bearish bets on the dollar.
Since the Fed’s June forecasts, the disinflationary process has stabilized somewhat — but inflation risks are increasing, said Lauren Goodwin at New York Life Investments. As a result, officials will likely keep the incremental quarter-point hike in their projections, she noted — adding that a final increase would possibly be delivered in November.
“Our Fed checklist suggests the bar for rate cuts is still high,” Goodwin said. “Unless we see a meaningful economic slowdown, inflation is likely to fall in a slow and non-linear way. In other words, for the Fed to cut rates next summer — like the bond market has priced — we believe we’d need to see a recession.”
Weak Housing Data
Data Tuesday showed new US home construction dropped to the lowest level since June 2020 — highlighting the toll of declining housing affordability.
The sharp slide is concerning because housing has been one of the pillars of the economy that has held up much better than expected, said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.
“If it turns out that this is the first crack in an otherwise bulletproof consumer, then it could change the narrative from an economy that is impervious to rapid interest rate hikes to one that is vulnerable and susceptible to a recession,” he added.
- Starbucks Corp. slipped after TD Cowen downgraded it to market perform, flagging “worrisome” pressures that could challenge same-store sales in China.
- Deere & Co. retreated after Evercore ISI downgraded the farm-equipment company to inline from outperform.
- Block Inc. dropped after the digital-payments firm said that Alyssa Henry, the CEO of its Square business, is leaving, with Jack Dorsey to take over.
- Royal Caribbean Cruises Ltd. and Carnival Corp. climbed after being upgraded by Truist Securities, which cited strong trends and “cooled off” stocks.
- Cboe Global Markets Inc. rose after the firm announced a chief executive officer change that analysts described as unexpected, while they were positive on the appointment to fill the role.
- Amazon.com Inc. says it will hire 250,000 employees this holiday shopping season and boost average pay for logistics personnel to about $20.50 an hour as it seeks to recruit and retain workers amid a labor shortage.
- Microsoft Corp. plans to refresh its Xbox consoles in the holiday season of 2024, according to a product roadmap posted online as part of its case against the Federal Trade Commission.
- CVC Capital Partners is gearing up for a potential listing as soon as November amid improved investor sentiment for new stock offerings, people with knowledge of the matter said.
Key events this week:
- Japan trade, Wednesday
- China loan prime rates, Wednesday
- UK CPI, Wednesday
- Federal Reserve policy meeting followed by Fed Chair Jerome Powell’s news conference, Wednesday
- Bank of Canada issues summary of its September policy meeting, Wednesday
- Eurozone consumer confidence, Thursday
- Bank of England policy meeting, Thursday
- US leading index, initial jobless claims, existing home sales, Thursday
- China’s Bund Summit, Friday
- Japan CPI, PMIs, Friday
- Bank of Japan rate decision, Friday
- Eurozone S&P Global Eurozone PMIs, Friday
- US S&P Global Manufacturing PMI, Friday
Some of the main moves in markets:
- The S&P 500 fell 0.1% as of 2:39 p.m. New York time
- The Nasdaq 100 was little changed
- The Dow Jones Industrial Average fell 0.3%
- The MSCI World index fell 0.1%
- The Bloomberg Dollar Spot Index was little changed
- The euro was little changed at $1.0682
- The British pound was little changed at $1.2394
- The Japanese yen fell 0.2% to 147.89 per dollar
- Bitcoin rose 1.3% to $27,127.5
- Ether rose 0.5% to $1,645.48
- The yield on 10-year Treasuries advanced five basis points to 4.35%
- Germany’s 10-year yield advanced three basis points to 2.74%
- Britain’s 10-year yield declined five basis points to 4.34%
- West Texas Intermediate crude fell 0.3% to $91.17 a barrel
- Gold futures were little changed
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Isabelle Lee, Liz Capo McCormick and Michael Mackenzie.
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