U.S. equities weakened on Monday while Treasury yields surged after Fed Chair Jerome Powell suggested the Fed may act more aggressively than expected at coming meetings to bring inflation under control.
Speaking at the National Association for Business Economics on Monday, Powell said the central bank will take “necessary steps” to get inflation under control, even if that means raising rates faster than previously anticipated. “If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so,”. Powell also acknowledged the possibility of 0.50% rate increases at coming meetings opposed to the more traditional 0.25% if warranted by incoming data. We’ll hear more from the Fed tonight with three members scheduled to give speeches and the probability of a 0.50% rate increase at the next two Fed meetings have now increased to slightly above 50%.
Treasury yields climbed across the curve with the 2-year rate up +18.7 basis points to 2.124%, as did both the 10 and 30-year rates by +15.3 and +10.7 basis points respectively. Breakeven inflation rates rose modestly across 5 and 10-years by +5.2 and +2.3 basis points while the 1-year rate climbed +13.8 basis points to 6.076% with the price of oil gaining overnight. The S&P500 edged -0.04% lower paring earlier weakness into the close following strong gains last week with gains in energy of +3.79% offset by weakness in consumer discretionary -0.76%, communications -0.67% and technology -0.18%. The Dow Jones also declined -0.58%, as did the Nasdaq Composite -0.40% and Russell 2000 -0.97% with the VIX lower by -1.21% to 23.58.
European equities were mixed as the war in Ukraine continued to weigh on sentiment with Ukraine rejecting a Russian demand to lay down arms and leave Mariupol and the European Union was considering imposing tougher sanctions on Russia including an oil embargo. The Euro Stoxx 600 edged +0.04% higher and the FTSE100 gained +0.51% benefiting from higher commodity prices and yields given its exposure to materials and financials. Elsewhere the DAX declined -0.60%, as did the CAC -0.57% and IBEX -0.34%. Government bond yields tracked oil and U.S. yields higher with 10-year yields rising between +4.4 basis points in Greece to +14.2 basis points in the U.K. The Euro weakened -0.31% to 1.1017 and the Pound edged lower by -0.09% to 1.3166.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
Despite weaker equities on Wall Street the ASX looks set to open strongly higher this morning with ASX200 futures up +80 points or +1.10% to 7,316. The index reversed initial gains to edged -0.22% lower on Monday weighed by a -0.56% decline in financials and -1.04% drop in health care, more than offsetting a +2.46% gain in technology. Shares in fund manager Magellan Financial Group dropped -4.2% after Hamish Douglass relinquished his seat on the board as part of his indefinite leave of absence after stepping down as chief investment officer last month. The Australian dollar is trading -0.23% weaker at 0.7398 and the 10-year government bond yield was little changed at 2.582% on Monday although we should expect similar moves higher to overseas yields today. Investors will look to a speech by RBA Governor Philip Lowe at midday local time for clues on the outlook for monetary policy.
Oil prices climbed as the European Union is considering an oil embargo of Russian oil with both WTI and Brent crude +7.46% and +8.03% higher at US$112.51 and US$116.60 a barrel. Iron ore futures in Singapore declined -1.61% on Monday and are trading a further -0.64% weaker at US$150.05 this morning. Gold rose +0.70% to US$1,935 despite higher real yields and strong USD, silver also gained +0.95% to US$25.20 while Bitcoin weakened -0.23% to US$41,212.
Economic data:
- RBA Governor Lowe Speech 12:00
- ECB President Lagarde Speech 00:15
- Fed William Speech 01:30
- Fed Daily Speech 05:00
- Fed Mester Speech 08:00
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
