Optimism in the markets faded as traders were left to contend with the prospect of a government shutdown and interest rates staying put at their highest in decades.
(Bloomberg) — Optimism in the markets faded as traders were left to contend with the prospect of a government shutdown and interest rates staying put at their highest in decades.
US stock gauges and Treasury bonds notched their worst quarters since September, 2022, while the dollar logged its best as traders came to terms with the message from Federal Reserve officials: get used to higher rates.
Bond market angst saw yields on the benchmark 10-year hit the highest since 2007 this week while the 30-year peaked near 2010 levels. A hawkish call from New York Fed President John Williams signaled interest rate hikes may be done, but the central bank will need to keep rates elevated to bring inflation back to the its 2% goal.
Read: Fed’s Williams Suggests Rate Hikes May Already Be Finished
His commentary did little to offer relief for yields, according to Krishna Guha, Evercore ISI’s head of central bank strategy.
“Williams’ comments overall confirm our view that the Fed is being pragmatic on the here-and-now decision as to whether a further hike is needed – and will end up dropping it – even as it adopts a tough posture on the outlook for rates in ‘24,” Guha wrote in a note.
Further cutting into optimism for the world’s largest economy is the prospect of a prolonged government shutdown and labor disruptions after the United Auto Workers extended plans for walkouts to more Ford Motor Co. and General Motors Co. plants.
Globally, bonds had their worst monthly selloff since February. High interest rates across the board made the July-September quarter the worst for MSCI’s all-country index since September, 2022 as surging oil prices fanned fears over inflation and economic growth.
While rates may have reached their peaks, central banks are being hard-pressed to walk a fine line between reining in rising prices and skirting a recession.
Pershing Square Capital’s Bill Ackman sounded a note of caution on longer-dated Treasuries. The yield on the 30-year has risen around 82 basis points since the end of June and touched about 4.81% Thursday, the highest since 2010. He told CNBC that rate could reach beyond 5%.
Read: Long-Bond Yield’s Biggest Jump Since ‘09 Has Ackman Eying 5%
“Looking ahead, regardless of whether the landing is ultimately hard or soft, we think US and global economic activity is set to slow over the next year,” said Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management. She remains bullish on bonds maturing in five to ten years.
“Falling inflation should bolster the real return on fixed income, despite the recent rebound in energy prices,” she added.
Crude logged its biggest quarterly gain since March 2022.
Some of the main moves in markets:
- The S&P 500 fell 0.3% as of 4:01 p.m. New York time
- The Nasdaq 100 was little changed
- The Dow Jones Industrial Average fell 0.5%
- The MSCI World index was little changed
- The Bloomberg Dollar Spot Index was little changed
- The euro was little changed at $1.0571
- The British pound was little changed at $1.2201
- The Japanese yen was little changed at 149.43 per dollar
- Bitcoin fell 0.6% to $26,929.3
- Ether rose 0.6% to $1,665.78
- The yield on 10-year Treasuries was little changed at 4.57%
- Germany’s 10-year yield declined nine basis points to 2.84%
- Britain’s 10-year yield declined five basis points to 4.44%
- West Texas Intermediate crude fell 0.9% to $90.90 a barrel
- Gold futures fell 0.7% to $1,865.60 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Vildana Hajric, Julia Fanzeres, Rob Verdonck, Abhishek Vishnoi, Tassia Sipahutar and Sujata Rao.
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