Global stocks experienced a slight decline and the yield on the 10-year Treasury reached levels not seen since 2007 after a sharp drop in U.S. homebuilding last month. The Federal Reserve is facing a challenge in presenting its outlook on inflation and the economy amid these developments. Investors are cautious and avoiding major bets as they await rate decisions from the Fed, the Bank of England, and the Bank of Japan later in the week. Oil prices have risen for the fourth consecutive session, reaching over $95 a barrel for global benchmark Brent crude. This surge raises concerns about the need for higher rates to counter inflationary pressures.
The futures market indicates a 99% probability that the Fed will pause its aggressive rate hikes during their meeting on Wednesday. Fed Chairman Jerome Powell is expected to maintain a hawkish stance during the news conference. Bill Sterling, a global strategist, stated that he expects Powell to reprise his Jackson Hole speech, emphasizing the Fed’s commitment to achieving 2% inflation and being prepared to raise rates if necessary. The impact of rising interest rates on the housing market is evident, with a significant drop in homebuilding in August to a three-year low.
Joe LaVorgna, chief U.S. economist at SMBC Nikko Securities America Inc, explains that the market has adjusted its outlook on rate cuts by the Fed next year due to concerns over sticky inflation, driven by higher oil prices and potential inflationary wage negotiations. However, there is a positive sign in weakening job openings which may lead to lower employment costs. The benchmark 10-year Treasury yield rose slightly to 4.365%, just below the 16-year high reached in August. The two-year yield, reflecting interest rate expectations, increased by 3 basis points to 5.094%.
The rise in Canadian inflation, driven by increasing gasoline prices, further solidified expectations that interest rates will remain higher for longer. The global stock gauge, MSCI, closed down 0.17%, with the STOXX 600 index in Europe also edging 0.04% lower. On Wall Street, the Dow Jones Industrial Average fell 0.31%, the S&P 500 lost 0.22%, and the Nasdaq Composite dropped 0.23%. The dollar index inched up by 0.06%, holding near a six-month high.
Central banks and investors are grappling with the 30% increase in oil prices since late June, driven by supply limitations from Saudi Arabia and Russia, increased demand, and weak U.S. shale output. Oil prices slid on Tuesday after hitting a 10-month high on profit-taking. The Bank of England is expected to raise rates by 25 basis points to 5.5%, potentially the final increase of the cycle. The Bank of Japan is likely to maintain its negative interest rates but will be watched closely for any signals of a departure from ultra-loose policy. Gold prices held near a two-week peak as attention turns to the Fed’s policy meeting.
Sources:
– Reuters
