It is simply astounding, the relentless pace that fixed income yields continue to rise. First, it was the two-year US Treasury note that smashed through 4% to a hefty 4.2% yield; today (Tuesday) the 10-year note is at a 4-handle and 30-year mortgage rates are being quoted at over 7%.
Financial markets sold off across the globe as investors confronted slowing growth, ripping inflation and escalation of the Ukraine war — and another 75-basis-point (bp) rate hike from the Federal Reserve.
Yesterday’s 75-basis-point (bp) rate hike was no shocker but we were surprised by the changes in the Summary of Economic Projections.
Today the Federal Open Market Committee (FOMC) will make its fed funds rate hike, and it is going to be a doozy. The median forecast is for the FOMC to raise rates by 75 basis points (bp), but I am expecting a truly jumbo rate hike of 100 bp that will bring the fed funds rate to 3.50%.
U.S. stocks posted their worst weekly slide since June, marking the fourth drop in the last five weeks. Hotter than expected August inflation triggered fears of higher interest rates, and disappointing FedEx results portended a weakening economy.
August’s CPI increase came as a surprise to many, and the market did not react favorably. Though the month over month change was a modest 0.2%, a raise is still a raise; and it’s also raising concerns over just how well the Federal Reserve is doing in its matchup against inflation.
The market was expecting, even demanding, a nice cool breeze from the inflation report but instead got roasted.
Global stock markets advanced as investors shrugged off worries about rising interest rates and sluggish economic growth. The major U.S. indexes snapped a three-week losing streak even as the Federal Reserve reaffirmed it would keep tightening policy until it achieved its price target.
As we noted in the Global Perspectives 3Q22 Mid-Year Outlook, “The fire hose of bad news has been spraying from geopolitics, inflation and the markets all year long, wreaking havoc on investors’ ability to make coherent decisions.” The spraying continued today, as the European Central Bank raised rates by 75 basis points (bp), exceeding expectations for 50 bp, and with more increases likely to come. In that same Outlook, we also stated, “The good news is that while the macro environment may drive markets in the short term, as it is doing now, fundamentals ultimately drive markets over the long term.” August ISM Services PMI rose to 56.9, better than expected. The new orders component surged to 61.8, the best since September. The August nonfarm payroll report jumped by 315,000; even though the unemployment rate ticked up it was still low at 3.7%. Meanwhile, S&P 500 2Q22 earnings rose by a better than expected 8.5% compared to the second quarter a year ago. So I would recommend taking the fire hose of bad news with a grain of salt.
The major U.S. stock indexes fell for a third week. Markets declined as better than expected economic data heightened concerns of more aggressive interest rate hikes to come.