NEW YORK/LONDON, Nov 18 (Reuters) – Global stocks edged higher and a key part of the Treasury yield curve inverted further on Friday, a sign the U.S. economy will stagnate next year and investors hope to induce the Federal Reserve to back off its aggressive interest rate hike.
Surprisingly strong retail sales data this week hammered home the idea that the Fed will tighten monetary policy further, even as muted pressures on consumer and producer prices suggest inflation has peaked and would allow lower rates.
Treasury yields rose for a second day following hawkish comments Thursday from St. Louis Fed President James Bullard, who said rates needed to rise to at least a range between 5% and 5.25% to be “sufficiently restrictive” to curb inflation.
The remarks were a blow to investors who had bet rates would peak at 5% or lower. Futures contracts now show the fed funds rate at 5.05% by May, up from 3.83% currently . But futures also show rates will fall to 4.66% in December 2023 on expectations that the Fed is poised to ease policy as the economy weakens.
Boston Fed President Susan Collins added to the Fed’s hardline stance, telling CNBC that with little evidence price pressures are easing, policymakers may need another rate hike. 75 basis points to control inflation.
Three senior European politicians have also said the European Central Bank needs to raise rates enough to dampen growth, as it is also battling high inflation.
“Where we think the market is getting it wrong is pricing in rate cuts next year,” said Dec Mullarkey, managing director of investment strategy and asset allocation at SLC Management. .
“Powell has often argued that ‘we’re worried that if you release too quickly you’ll have a second bout of inflation,’ and that’s not something they want to repeat,” Mullarkey said, referring to the chairman of the Fed. Jerome Powell.
The market faces a recession next year as the yield spread between two- and 10-year Treasuries was -71 basis points, an inversion of the yield curve that did not reach such highs. depths since at least 2000.
When yields are lower on the 10-year note than on the two-year note, a security that reflects interest rate expectations, it suggests a slowdown or worse and that the Fed will cut rates to boost inflation. economy.
The impact of rising rates was felt in housing, where sales of existing homes in the United States fell for a ninth consecutive record month in October, as the 30-year fixed mortgage rate reached a peak in 20 years.
The yield on the two-year note rose 7.7 basis points to 4.531%, well above the yield on the 10-year note, which rose 5 basis points to 3.823%.
The MSCI Global Equity Index (.MIWD00000PUS) rose 0.48% but was heading for a loss of about 0.5% on the week, after hitting recent two-month highs. The pan-European STOXX 600 index (.STOXX) 1.16%, its best one-day performance in more than a week.
Inflows into global equity funds hit their highest level in 35 weeks in the week ending Wednesday, according to a report from Bank of America (BofA), as investor optimism intensified.
Stocks rose on Wall Street in a choppy session. The Dow Jones Industrial Average (.DJI) rose 0.6%, the S&P 500 (.SPX) gained 0.48% and the Nasdaq Composite (.IXIC) rose 0.01%. For the week, the Dow was unchanged, the S&P 500 fell 0.69% and the Nasdaq lost 1.57%.
The euro fell 0.35% to $1.0324, after hitting a four-month high of $1.0481 hit on Tuesday as some policymakers urged caution on tightening.
The yen weakened 0.15% against the dollar to 140.41.
Chinese blue chips (.CSI300) fell 0.45% amid reports that Beijing had asked banks to check bond market liquidity after soaring yields caused losses for some investors.
There were also fears that a rise in COVID-19 cases in China could jeopardize plans to ease tough movement restrictions that have strangled the economy.
The Japanese Nikkei (.N225) fell 0.1% as data showed inflation hit a 40-year high as a weak yen fueled import costs.
Oil fell around 2% and recorded its second weekly decline, under pressure from concerns over weakening demand in China and further hikes in US interest rates.
U.S. crude futures fell $1.56 to settle at $80.08 a barrel, while Brent settled down $2.16 at $87.62.
US gold futures settled down 0.5% at $1,754.4 an ounce.
Bitcoin fell 0.31% to $16,634.00.
Reporting by Herbert Lash in New York Additional reporting by Carolyn Cohn in London, Wayne Cole in Sydney and Lisa Mattackal in Bengaluru Editing by Philippa Fletcher and Matthew Lewis
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