© Reuters. Passersby walk past an electric monitor displaying the Japanese yen exchange rate against the U.S. dollar outside a brokerage in Tokyo, Japan October 4, 2023. REUTERS/Issei Kato/File photo
By Herbert Lash and Amanda Cooper
NEW YORK/LONDON (Reuters) -The benchmark U.S. Treasury yield rose above 5% to a 16-year high on Monday, while a key S&P indicator that points to a downturn in stocks spelled trouble ahead for the U.S. economy as interest rates are expected to stay high for an extended period.
Higher bond yields and the risk of a wider Mideast conflict soured investor sentiment at the start of a week full of major corporate earnings and key inflation data. A gauge of global equity markets fell to an almost seven-month low on the outlook.
The hit 5.021% and was last up 1.3 basis points on the day, signaling the scale of the global bond sell-off. The surge in yields, which move inversely to prices, has been driven by an increase in government debt and supply of bonds around the world, as economic uncertainty leads investors to demand a greater premium to hold longer-dated bonds. [US/]
A steepening of the yield curve, where the 10-year’s yield is rising and closing in on the higher two-year yield, suggest an economic slowdown in 2024, said Tom di Galoma, managing director and co-head of global rates trading at BTIG in New York.
“We’re going to see a steeper yield curve and that’s going to put pressure on long-term rates,” di Galoma said. “In the next six to nine months we’ll see a fairly extensive economic slowdown and that’s what the market’s pricing in.”
The difference between yields on two- and 10-year notes, which shows the yield curve remains inverted with the short-end higher than longer-dated securities, was at -21.3 basis points.
Also roiling markets was the closing price of the slipping under its 200-day moving average on Friday, di Galoma said.
HEADED LOWER
“That’s a signal that equity markets are probably headed lower due to the slowdown and other geopolitical risks,” he said in reference to the Mideast conflict.
MSCI’s gauge of equity performance across the globe shed 0.12%, slipping to a low last seen in late March, while the pan-European index lost 0.16%.
On Wall Street stock markets pared losses to trade mixed. The fell 0.04%, the S&P 500 gained 0.05%, and the added 0.23%. Futures imply around a 70% chance that the Fed is done with tightening this cycle and are flirting with the chance of a quarter-point cut roughly by July 2024.
The jump in yields has also challenged equity valuations, dragging most major indexes lower last week, while the “fear index” of U.S. stock market volatility hit its highest since March.
From an economic perspective 5% is just another number but it resonates with investors, said Daiwa Capital chief economist Chris Scicluna.
“I don’t think it’s a tipping point, but it’s a reminder of the record tightening we’ve had,” Scicluna said, adding that it also shows the Fed “can’t be entirely sure quite how much of that tightening so far has already been transmitted to the real economy and how much more is to come.”
The conflict in the Middle East was high on investors’ minds as Israeli aircraft struck southern Lebanon overnight and Israeli troops and Palestinians clashed in the occupied West Bank.
GROWTH SURGE
Major companies including Microsoft (NASDAQ:), Alphabet (NASDAQ:), Amazon (NASDAQ:) and Meta Platforms (NASDAQ:) all report earnings this week. IBM (NYSE:) and Intel (NASDAQ:) are also on the docket.
Profits should be supported by the strength of consumer demand, with figures on U.S. gross domestic product this week expected to show annualized growth of a heady 4.2% in the third quarter, and nominal annualized growth possibly as high as 7%.
This U.S. outperformance has underpinned the dollar, though the threat of Japanese intervention has capped it at around 150.00 yen, at least for the moment. The dollar was last trading at 149.85 yen, just below its recent peak of 150.16.
Yields in Japan were also on the rise on speculation the Bank of Japan was discussing a further tweak to its yield curve control policy, which might be announced at its policy meeting on Oct. 31.
The euro rose to $1.0627, while the Swiss franc, which has benefited from a flight to safety over the past couple of weeks, held steady at 0.8928 per dollar, and was weaker against the common currency at 0.9485 per euro.
The ECB meets later this week and is expected to leave interest rates unchanged at 4%. Investors will be looking for any kind of signal from ECB President Christine Lagarde about how the rise in global bond yields might affect the outlook for euro zone monetary policy.
Gold, which hit its highest since May last week thanks also to safe-haven inflows, slipped slightly to $1,977 an ounce. [GOL/]
Oil prices also edged lower, with down 0.62% at $91.59 a barrel, though the bigger news in oil markets was that Chevron (NYSE:) said it agreed to buy Hess (NYSE:) for $53 billion in stock.
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