Treasury yields climbed as Jerome Powell reinforced the recent message of a raft of policymakers, signaling the Federal Reserve isn’t done yet with its interest-rate hikes.
(Bloomberg) — Treasury yields climbed as Jerome Powell reinforced the recent message of a raft of policymakers, signaling the Federal Reserve isn’t done yet with its interest-rate hikes.
Two-year yields, which are more sensitive to imminent Fed moves, hit the highest since March. Benchmark 10-year rates hovered near 3.8%. The dollar rose. The S&P 500 struggled to find solid footing, KB Home slipped on a disappointing outlook and the Nasdaq 100 outperformed amid gains in giants like Amazon.com Inc., Apple Inc. and Microsoft Corp.
Speaking to a Senate banking panel on Thursday, Powell reiterated his view that it would be appropriate to raise rates twice more this year to reduce US growth and contain price pressures. Fed Governor Michelle Bowman added her voice to the drumbeat of officials who want to resume hiking after taking a break from their tightening campaign last week.
“We do expect inflation to be sticky,” Meghan Robson, head of US credit strategy at BNP Paribas, told Bloomberg Television. “So we’re calling for one more rate hike in July, and for the Fed to remain on hold for the rest of the year.”
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To Kristina Hooper, chief global market strategist at Invesco, if the Fed does tighten two more times this year, it risks sending the economy into a “significant recession.”
“I’m sounding like a broken record, but I’ll say it again: There is a lengthy lag between when monetary policy is implemented and when it actually shows up in the real economy data,” Hooper added. “We haven’t seen much of an impact yet because of that lag. That’s why we have to worry so much about overkill.”
In economic news, US unemployment benefit applications were unchanged last week at the highest level since October 2021, suggesting the labor market is cooling somewhat. Sales of previously owned homes barely rose in May as high mortgage rates continued to crimp demand and discourage owners from listing their properties.
US equities are in for a tumultuous second half of the year as the lagging impacts of aggressive monetary tightening by the Fed catch up to the economy, according to JPMorgan Chase & Co.’s Marko Kolanovic.
“In equities, absent pre-emptive Fed easing – vs. Fed dots that imply two more hikes by year-end – we expect a more challenging macro backdrop for stocks in 2H, with softening consumer trends at a time when equities have re-rated sharply,” Kolanovic said Thursday in his mid-year outlook note to clients.
Low Conviction
While US equities stormed into bull territory in June, investors haven’t bought into the rally en masse.
There are already signs of low conviction in the S&P 500’s 14% rally this year, with the index set to end its longest weekly winning streak since 2021. Bank of America Corp.’s latest survey shows a net 25% of global money managers are still underweight US equities, despite a recent improvement in allocation.
Elsewhere, the Bank of England unexpectedly raised its benchmark interest rate by a half percentage point, warning it may have to hike again. Norway’s central bank accelerated its hikes and pledged more aggressive tightening, intensifying its response to stubborn inflation and a weak currency.
Meantime, Turkey’s lira slumped as the central bank delivered a significantly smaller interest-rate increase than anticipated, as policymakers embark on what they said will be a gradual transition from an era of ultra-cheap money.
Key events this week:
- Eurozone S&P Global Eurozone Manufacturing PMI, S&P Global Eurozone Services PMI, Friday
- US S&P Global Manufacturing PMI, Friday
- Fed Bank of St. Louis President James Bullard speaks, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 was little changed as of 12:05 p.m. New York time
- The Nasdaq 100 rose 0.6%
- The Dow Jones Industrial Average fell 0.2%
- The Stoxx Europe 600 fell 0.5%
- The MSCI World index fell 0.2%
Currencies
- The Bloomberg Dollar Spot Index rose 0.3%
- The euro fell 0.3% to $1.0952
- The British pound fell 0.2% to $1.2746
- The Japanese yen fell 0.7% to 142.91 per dollar
Cryptocurrencies
- Bitcoin fell 0.3% to $29,884.15
- Ether was little changed at $1,879.1
Bonds
- The yield on 10-year Treasuries advanced eight basis points to 3.79%
- Germany’s 10-year yield advanced six basis points to 2.49%
- Britain’s 10-year yield declined four basis points to 4.37%
Commodities
- West Texas Intermediate crude fell 4% to $69.60 a barrel
- Gold futures fell 1% to $1,924.90 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Carly Wanna and Peyton Forte.
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