Treasury yields steadied after epic declines and the dollar edged higher as investors await US inflation data later Tuesday that may upend bets that the Federal Reserve is done tightening.
(Bloomberg) — Treasury yields steadied after epic declines and the dollar edged higher as investors await US inflation data later Tuesday that may upend bets that the Federal Reserve is done tightening.
The yield on the two-year Treasury extended a drop on Tuesday before recovering to hover around 4%, after the deepest three-day plunge since the Black Monday stock-market crash of 1987. The 10-year yield dipped four basis points to 3.53%, while a gauge of the greenback snapped three days of losses.
Futures on the S&P 500 and Nasdaq 100 rose about 0.2%. Europe’s Stoxx 600 equity benchmark was little changed after falling the most since December yesterday, though a gauge of European bank stocks extended a decline. Credit Suisse Group AG slipped after uncovering accounting weaknesses.
Treasuries have been whipsawed in recent days along with banking stocks as the collapse of Silicon Valley Bank and two other US lenders prompted bets that the Federal Reserve will pause its hiking cycle and even cut interest rates to stabilize the financial system. But a hot inflation reading later today could muddy that outlook, sparking a fresh wave of volatility in fixed-income markets.
“A policy mistake is hands down the biggest risk in the market,” Mary Manning, global portfolio manager for Alphinity Investment Management, said on Bloomberg Television. “Controlling inflation but also addressing the fact there is some instability in the banking system is difficult.”
Swap contracts referencing Fed policy meetings — which last week favored a half-point rate increase at next week’s gathering of officials — slashed the odds of any increase to less than one-in-two. Meanwhile, contracts for the rest of 2023 suggest that the Fed could cut rates by almost a full percentage point from the peak in May before the year is out.
Financial stocks have taken the brunt of the losses in share markets, shedding $465 billion in market value in two days. A gauge of Asian stocks fell 2%, wiping out gains for 2023.
Goldman Sachs Group Inc. economists as well as asset managers from the world’s largest actively managed bond fund, Pacific Investment Management Co., said the Fed could take a breather on the policy rate following the collapse of SVB. Nomura Holdings Inc. economists took it one step further, saying the Fed could cut its target rate next week.
Analysts at BlackRock Investment Institute, however, do not expect the Fed to halt its rate-hike campaign because of the recent developments. “Instead, by shoring up the banking system, the Fed can focus monetary policy on bringing inflation down to its 2% target,” they wrote in a note.
Key Data
Traders are looking to the US consumer price index report later in the day for cues that may trigger further shifts in bets on the Fed’s next move.
“If this CPI print within the next 24 hours is in line with consensus or no worse than consensus then market sentiment can calm, but if we get a strong number, all bets are off the table,” Andrew Ticehurst, senior economist and rates strategist for Nomura Australia Ltd., said on Bloomberg Television. “That would put the Fed in a really difficult position because the data would say you need to hike and we’ve got financial stability risks pointing the other way.”
The S&P 500 closed Monday down 0.2%, after bouncing between gains and losses amid a rout in bank shares while the policy-sensitive Nasdaq climbed 0.8%, the most in over a week. The fallout from SVB’s collapse prompted President Joe Biden to promise stronger regulation of US lenders, while reassuring depositors that their money is safe.
The SVB meltdown has also caused a swift repricing in credit risk. Yield premiums on company debt, which had trended lower for much of this year, have climbed back to levels seen in November, according to a Bloomberg index that includes investment-grade and junk bonds.
Oil extended a decline ahead of the inflation data as the biggest US bank collapse since 2008 continued to ripple through financial markets, while Asian energy shares fell. Gold slid after rising in the three previous sessions as traders turned to haven assets.
Key events this week:
- US inflation, Tuesday
- China retail sales, industrial production, medium-term lending, surveyed jobless rate, Wednesday
- Eurozone industrial production, Wednesday
- US business inventories, retail sales, PPI, empire manufacturing, Wednesday
- Eurozone rate decision, Thursday
- US housing starts, initial jobless claims, Thursday
- Janet Yellen appears before the Senate Finance Committee, Thursday
- US University of Michigan consumer sentiment, industrial production, Conference Board leading index, Friday
Some of the main moves in markets:
Stocks
- The Stoxx Europe 600 was little changed as of 8:12 a.m. London time
- S&P 500 futures rose 0.2%
- Nasdaq 100 futures rose 0.2%
- Futures on the Dow Jones Industrial Average rose 0.2%
- The MSCI Asia Pacific Index fell 2.2%
- The MSCI Emerging Markets Index fell 1.6%
Currencies
- The Bloomberg Dollar Spot Index rose 0.3%
- The euro fell 0.4% to $1.0692
- The Japanese yen fell 0.6% to 133.95 per dollar
- The offshore yuan fell 0.3% to 6.8754 per dollar
- The British pound fell 0.3% to $1.2148
Cryptocurrencies
- Bitcoin rose 0.3% to $24,300.26
- Ether fell 0.3% to $1,666.46
Bonds
- The yield on 10-year Treasuries declined four basis points to 3.54%
- Germany’s 10-year yield declined three basis points to 2.23%
- Britain’s 10-year yield advanced two basis points to 3.39%
Commodities
- Brent crude fell 0.9% to $80.05 a barrel
- Spot gold fell 0.3% to $1,908.48 an ounce
This story was produced with the assistance of Bloomberg Automation.
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