US stocks rise and government bonds sell off as traders anticipate rate hikes
Shares on Wall Street rose on Tuesday and US government bond prices fell as investors anticipated tighter monetary policy from the Federal Reserve.
The S&P 500 index rose 1.1% as investors balanced Fed Chairman Jay Powell’s remarks on the need for a quick rise in interest rates with his assurance that a tightening won’t happen. would not trigger a recession. The tech-heavy Nasdaq Composite added 2%.
Meanwhile, the yield on the benchmark 10-year US Treasury rose 0.09 percentage points to 2.38% – the highest level since May 2019 – as its price fell.
Powell said on Monday that the Fed should move “quickly” toward tighter monetary policy. He also brushed off fears it could cause a recession, citing episodes from 1965, 1984 and 1994 when the central bank slowed an overheating economy without causing a sharp contraction.
“The bond market is reacting to expectations of monetary policy tightening, but equity markets are saying that if Powell is confident about the growth outlook, risk assets will do well,” said Seema Shah, global investment strategist. at Principal Global Investors.
“Stock markets reacting this way is a bit surprising,” she added. “One of those views is going to give at some point.”
Not all investors were convinced that the Fed’s tough rhetoric would translate into policy decisions, which could potentially explain the continued support for equities.
“This is a Fed talking very hawkishly and forcing the market to do the dirty work for them,” said Andy Brenner, head of international fixed income at NatAlliance Securities. “I don’t think it’s an aggressive Fed.”
Tesla rose 7.9% on Tuesday after the electric carmaker opened a factory in Germany, pushing its market capitalization above $1 billion for the first time since January.
Europe’s Stoxx 600 stock index, which remains around 6% lower for the year, ended the day up 0.8%, with strong gains for financials. Bundesbank President Joachim Nagel said on Monday that the European Central Bank should raise interest rates this year if the inflation outlook warrants it. Germany’s Xetra Dax closed up 1% and London’s FTSE 100 gained 0.5%.
The US Treasury market is having its worst month since 2016 after the Fed raised interest rates last week for the first time since 2018. Consumer price inflation in the US hit a 40-year high years of 7.9% last month.
Russia’s invasion of Ukraine has caused sharp rises in commodity prices, from oil to wheat, exacerbating inflationary pressures caused by the surge in demand following coronavirus shutdowns and prompting markets to predict that the The Fed will raise its key interest rate to more than 2% by December.
“Inflation expectations for the next one to two years are now extremely high,” said Brian Nick, chief investment strategist at Nuveen. “But the scenario in which the Fed goes ahead and does what it signals it will do is probably the best-case scenario,” he added. “Do too little and inflation becomes more entrenched.”
The yield on the 10-year German Bund, a barometer of borrowing costs for the euro zone, rose 0.04 percentage points to 0.5%, its highest level since October 2018.
Brent crude stood 0.1% lower on Tuesday at $115.48 a barrel, with the international oil benchmark still nearly 20% higher since Feb. 23, the day before the invasion. Ukraine by Russia.
Hong Kong’s Hang Seng Index gained 3%. He began rallying last week when Chinese Vice Premier Liu He made a rare intervention to pledge state support for the economy and capital markets.