Investors are coming to terms with an economy which refuses to slow down. The selling of US government bonds continued on Monday. Yields on benchmark Treasuries hit new 16-year-highs.
The yield on the 10-year bond rose by 0.1 percentage points, to 4.35 percent. This is the highest since November 2007, and it surpasses the previous high of October. In late afternoon trading, the yield was still near that level. Bond yields increase when bond prices drop.
Investors are looking forward to a high profile gathering of world central bank chiefs later this week in Wyoming, where policymakers could signal that interest rates need to stay higher for a prolonged period in order to keep inflation from rising.
While many central bankers are expected to attend the Jackson Hole Conference, Federal Reserve Chair Jay Powell’s Friday speech will be closely examined for any additional hints about the future direction and pace of US monetary policies.
Steve Englander is the head of Standard Chartered’s global G10 FX Research. He said: “We expect him present a modestly hawkish baseline policy stance for the medium term, allowing the risk that the Fed has finished hiking, but not closing down the possibility of further tightening. While dampening expectations of an early cut.”
The US Treasury’s months-long decline has been mirrored by the yields of 10-year bonds on the other side. In the UK and Germany, the yields have recently reached their highest level since 2008 and 2011.
The minutes of the Fed’s meeting in July, published last week, revealed that members of the rate-setting committee of the central bank saw “significant downside risks to inflation” which could lead to further tightening monetary policy.
The recent spate of strong economic data has led to doubts about the Fed’s ability to cut rates anytime soon. This has also been the primary cause behind the sell-off on the Treasury markets.
Karl Schamotta is the chief market strategist of Corpay. He said, “The US economy continues defying widespread scepticism. Upside surprises continue to come at a steady pace and push yields higher.”
Away from Wall Street, S&P 500 benchmark closed 0.7% higher after a steep sell-off in the previous week. The Nasdaq Composite, which is heavily tech-heavy, gained 1.5 percent.
Nvidia shares, which are up over 200 percent year-to date, rose by 8.5 percent ahead of the company’s earnings report due later this week.
Joel Kruger is a market strategist for LMAX Group. He said, “The financial markets have had a bad run and investors are now worrying about the Fed outlook. This still leaves wiggle room for upcoming events that could be even less friendly to investors.”
“Throw in lots of worries about the future of China.” . . ] “It’s a stomach-turning background that market participants have to deal with,” he said. On Monday, the outlook for China’s economy took a new blow after the most recent policy decision of the country’s central bank fell short of market expectations.
The People’s Bank of China has lowered the one-year prime rate for loans, which is a benchmark rate used by banks, to 3.45 percent. However, it chose to maintain its equivalent five-year rate at 4.2 percent.
Bloomberg polled economists who had all predicted a 0.15 percent reduction in the rates for one year and five years.
Hong Kong’s Hang Seng fell by 1.8 percent, while China’s benchmark CSI 300 declined 1.4 percent, its lowest level since last November.
Investors’ calls for government assistance come amid heightened concern over China’s economy. The country has been struggling to gain momentum since it reopened at the beginning of the year after a long period of pandemic lockdowns.
Researchers at UBS Investment Bank have revised their estimates for China’s economic growth in 2023 from 5,2% to 4,8%. They cited a decline in the property sector in China, declining global demand and underwhelming stimulus measures by the government.
Tao Wang is the chief China economist for UBS Investment Research. He said, “The government has shown less policy support than earlier in the year and less than what we anticipated.”
Recent data has shown that the second largest economy in the world is sliding into deflation. Its exports are down and its youth unemployment is up, leading the government to stop publishing this statistic.
The Stoxx 600, which is a regional index of European stocks, rose less than 0.1% on Monday. The Cac 40 in France gained 0.5 percent and the Dax in Germany advanced by 0.2 percent.
After crude oil prices rose, energy stocks in Europe led the gains. Opec+ data indicated that global supply had begun to tighten as Saudi Arabia and Russia reduced exports.
The oil prices fell later. Brent crude, the international benchmark, settled 0.4 percent lower at $84.46 per barrel. US West Texas Intermediate dropped 0.7 percent to $80.72 per barrel.