US stock and bond prices soar as traders assess yield outlook

US equities broke their recent losing streak on Wednesday, as government bond prices rose despite new warnings of hefty interest rate hikes.

The tech-heavy Nasdaq Composite index rose 2.1 cents for its first daily gain of the month, and the broader S&P 500 index rose 1.8 percent.

In bond markets, the yield on the 10-year US Treasury bill — which is seen as a measure of borrowing costs around the world — fell 0.08 percentage points to 3.26 percent. Yields fall as prices rise.

Treasuries were sold in the previous session after a positive survey of the services sector in the world’s largest economy raised expectations that the Federal Reserve would continue to tighten monetary policy aggressively.

Wednesday’s recovery came despite further aggressive statements from several leading central bankers. Thomas Barkin, president of the Fed’s Richmond branch, told the Financial Times that the central bank should raise interest rates to levels that constrain economic activity “until we are truly convinced that we can control inflation.” to keep”.

Meanwhile, Fed Vice Chair Lael Brainard told a New York conference that “we’ll be on this for as long as it takes to reduce inflation,” and The Wall Street Journal reported that the central bank was “on track” to a third. consecutive rate hikes of 0.75 percentage point at the next policy meeting later this month.

Futures markets were counting on a 79 percent chance of a 0.75 percentage point gain, up from 75 percent the day before. The Fed’s current target range is between 2.25 and 2.5 percent.

Elsewhere, short-dated UK government bonds also recovered after a sell-off on Tuesday, with two-year yields falling 0.14 percentage points to 2.98 percent.

The surge in gold prices came as newly appointed British Prime Minister Liz Truss this week announced a package to ease the pressure of rising energy prices on households and businesses, which some analysts say could ease inflationary pressures in the near term.

“I think it’s a near-term recovery,” said James Athey, investment director at Abrdn. “Overall, the setup for gilts feels very precarious,” he added, referring to the Bank of England’s struggles to curb inflation.

Huw Pill, the BoE’s chief economist, told MPs on the House of Commons selection committee on Wednesday that Truss’ plans to freeze energy bills would likely force the central bank to raise interest rates, despite curbing inflation in the coming months. months. .

Bond market movements on Wednesday also followed a disappointing trade report from China, which showed that it had exported less than expected in August. Investors have been watching economic data closely in recent months, looking for clues as to how far central banks around the world will slack monetary policy in the face of a prolonged slowdown.

In China, exports rose 7.1 percent year-on-year last month, compared to an 18 percent growth in July. Economists polled by Reuters had forecast growth of 12.8 percent. The numbers were a “sign that slowing global growth and normalization of consumption patterns are weighing down demand for Chinese goods,” wrote Sheana Yue, China economist at Capital Economics.

A separate report shows that German industrial production contracted 0.3 percent month-on-month in July, compared with 0.8 percent growth in the previous month. Economists had expected a 0.5 percent contraction.

The European Central Bank will announce its own monetary policy decision on Thursday. Multiple Wall Street banks have said they expect a massive 0.75 percentage point rise in borrowing costs. In July, the ECB raised interest rates to zero for the first time in more than ten years by 0.5 percentage point sharper than expected.

But analysts are divided on how far and how fast the ECB will move, with some fearing higher interest rates will hit growth in the region. Matteo Cominetta, senior economist at the Barings Investment Institute, expects a 0.75 percentage point increase on Thursday, followed by smaller gains in October and December.

“I don’t think they can do more than that because if we move to the… [autumn] the evidence of a very deep recession will be clear,” he said.

The regional Stoxx 600 stock index in Europe closed 0.6 percent lower. Hong Kong’s Hang Seng closed 0.8 percent lower.

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