Stocks Slide as Inflation Signals Spook Bond Markets, Challenge Fed Rate Path
Frankfurt (Oct 4) Global stocks retreated Thursday amid the biggest spike in U.S. Treasury bond yields in nearly two years as investors challenged the Federal Reserve's policy of gradual interest rate hikes amid further signals of surging domestic growth and accelerating inflation.
Benchmark 10-year Treasury yields extended gains in overnight trading, following yesterday's 12 basis point increase -- the biggest single-day move since the 2016 Presidential elections -- taking them past 3.22% for the first time since 2011. Long-bond yields were also on the rise, jumping to 3.378% in what is known as a "bear steepening" of the yield curve, where long-term rates rise faster than shorter-term ones, before pulling back to 3.36%.
The moves, first triggered by a bullish assessment of the U.S. economy by Fed Chairman Jerome Powell yesterday, and cemented by the strongest reading for the ISM non-manufacturing index in 21 years, boosted the U.S. dollar index, which tracks the greenback against a basket of six global currencies, to a six-week high of 96.06 and pushed the yen to its lowest level against the dollar since October 2017.
The bond market moves suggest investors are ready to re-price inflation expectations based on anticipated wage growth, a bet that could be confirmed as early as Friday when the Commerce Department releases its September jobs report. Analysts are upping their payroll forecasts following both the ISM surge and the stronger-than-expected reading of private sector job creation from ADP, which showed 230,000 new additions last moth, and now see a September print of around 210,000.
Cleveland Fed President Loretta Mester, however, played down the recent spike, telling a conference in St. Louis that "the fact that interest rates moved on one day is not a concerning thing. Markets are volatile ... it is still appropriate for us to be moving interest rates up gradually."
The dollar's gains, alongside the spike in risk-free U.S. interest rates, drew cash out of emerging markets and the broader Asia region, pulling the MSCI ex-Japan index 1.66% lower heading into the final hours of trading while the Nikkei 225 fell 0.56% to close at 23,975.62 points.
Ominously, the Hang Seng index in Hong Kong fell 1.68% to 26,6363.43 points, closing below the Dow Jones Industrial Average for only the fourth time on record. The other three sub-Dow closing levels were during the SARS outbreak in 2003, the 9-11 terrorist attacks on the World Trade Center and the 1997/1998 Asian financial crisis.
Early indications from U.S. equity futures suggest the rate market volatility will likely cause a pullback in stock markets this morning, with contracts tied to the Dow set to snap a five-day winning streak with a 55 point decline at the opening bell. Contracts tied to the S&P 500 suggest an 9point slide for the broader benchmark while those liked to the tech-focused Nasdaq Composite were priced 37 points to the downside.
In Europe, the dollar's overnight move pushed the euro below the 1.15 mark for the first time since August 20, while the ongoing concern over the spending levels baked into Italy's proposed 2019 budget pushed 10-year government bonds yields to 3.33%.
However, benchmark 10-year German bund yields remained below the 0.5% level in early Thursday trading, as the regional risk backdrop continued to drive cash into the currency area's proxy for risk free rates, taking the gap between German and U.S. 10-year yields to 2.67%, the widest since 1988.
European stocks were weaker across the board at the start of trading, with the Stoxx 600 falling 0.8% by mid-day in Frankfurt and markets around the currency area recording similar percentage declines. Britain's FTSE 100 was also pulled into the red, falling 1% as the pound held firm at 1.2980 against the dollar in overnight trading.
Global oil prices were also impacted by the surging U.S. dollar, even as markets remain within touching distance for their recent four year highs, as investors accelerate bets on $100 crude in the face of looming U.S. sanctions on Iran.
Brent crude prices for December delivery, the global benchmark, were seen 13 cents lower from their Wednesday close in New York and trading at $86.16 per barrel. WTI contracts for November delivery, which are more tightly linked to U.S. gasoline prices, were marked 7 cents lower at $76.34 per barrel.
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