Treasury yields have been ‘off to the races’ in the wake of the US Federal Reserve meeting, which has spelled bad news for risk-assets. The 10-yr bond yield continues its ascent on expectations of a tighter rate environment, a move which is putting a host of assets on the defensive including gold and equities. During Asian trading hours on Friday, the yield on the 10-year note continued to tick in the direction of 4.5% which is adding to some anxiety across markets.
Why the big moves in bonds and equity markets? It was a double whammy from the Fed. Not only are they expecting a further 25bp of tightening this year, but they also doused expectations regarding loosening of policy in 2024.
Prior to the FOMC meeting, markets had been expecting that rates may be cut by 1% in total by the tail end of 2024, but the Fed projections are pointing towards the total loosening next year being only half this amount (i.e., 0.5%).
Essentially, the Fed prepped investors to expect rates to stay heightened for an extended period. And in response, risk appetite has taken a tumble. US stocks slumped and that theme has extended to Asian equity markets today.
In other central bank news, the Bank of England (BOE) followed the FOMC by holding, though this went against the consensus expectation for a further hike. As a result, the pound slid, though with UK CPI still running rampant at 6.7%, it’s quite easy to envisage further tightening before year-end by the BOE.
Markets are awaiting news from the Bank of Japan (BOJ) today though no change to policy is expected. What will be interesting to see, however, is whether there are further hints from authorities that the time of negative interest rates is drawing closer to the endpoint. Given the ongoing Yen weakness, the temptation must be there from the BOJ to try and jawbone some strength into the sagging currency.
Gold loses some lustre
Gold succumbed to the rise in treasury yields, but the downside has been somewhat limited as the precious metal is finding some buyers in search of safe haven assets. Resistance awaits at $1933 for gold should bond yields show signs of easing. The USD has steadied for the moment, but the DXY remains comfortably above the 105 level.
This USD strength and rhetoric of higher interest rates has taken a toll on the oil price in recent sessions, but so far, the pullback has been shallow. Investors are concerned about what a prolonged period of higher interest rates may mean for growth prospects. This concern has hit a number of assets, including oil. However, supply cuts look likely to protect any deeper downside moves in the short term.
Looking ahead, attention will be on the release of PMI data around the globe for clues as to whether central bank policy stances align with the latest economic indicators.
Market commentary from Tim Waterer, chief market analyst at KCM Trade
