US stocks snapped their recent losing streak on Wednesday, while government bond prices rose despite fresh warnings about large interest rate rises.
The tech-heavy Nasdaq Composite index jumped 2.1 cent for its first daily rise of the month, and the broader S&P 500 index rose 1.8 per cent.
In bond markets, the yield on the benchmark 10-year US Treasury note — seen as a proxy for borrowing costs around the world — fell 0.08 percentage points to 3.26 per cent. Yields fall when prices rise.
Treasuries had sold off in the previous session after a positive survey on the services industry in the world’s largest economy fuelled expectations that the Federal Reserve would continue to aggressively tighten monetary policy.
Wednesday’s rebound came despite further hawkish statements from several senior central bankers. Thomas Barkin, president of the Fed’s Richmond branch, told the Financial Times that the central bank must lift interest rates to a level that restrained economic activity “until such a time as we really are convinced that we put inflation to bed”.
Meanwhile, Fed vice-chair Lael Brainard told a conference in New York that “we are in this for as long as it takes to get inflation down”, and The Wall Street Journal reported the central bank was “on a path” towards a third consecutive 0.75 percentage point rate rise at its next policy meeting later this month.
Futures markets were pricing in a 79 per cent likelihood of a 0.75 percentage point increase, up from 75 per cent the previous day. The Fed’s current target range stands at between 2.25 per cent and 2.5 per cent.
Elsewhere, UK short-dated gilts also rebounded after a sell-off on Tuesday, with the two-year yield sliding 0.14 percentage points to 2.98 per cent.
The rise in gilt prices came as newly appointed UK prime minister Liz Truss was poised to announce a package this week to alleviate the pressure of soaring energy prices on households and businesses, which some analysts believe could reduce near-term inflationary pressures.
“I think it’s a short-term recovery,” said James Athey, investment director at Abrdn. “In general, the set-up for gilts feels very precarious,” he added, mentioning the Bank of England’s struggle to rein in inflation.
Huw Pill, the BoE’s chief economist, told MPs on the House of Commons Treasury select committee on Wednesday that Truss’s plans for a freeze in energy bills was likely to force the central bank to raise interest rates despite bringing down the inflation rate in the coming months.
The moves in bond markets on Wednesday also followed a disappointing trade release from China, showing that it had exported less than expected in August. Investors have been scrutinising economic data closely in recent months for clues about the extent to which central banks around the world will turn the screws on monetary policy in the face of a protracted slowdown.
In China, exports rose 7.1 per cent year on year last month compared with growth of 18 per cent in July. Economists polled by Reuters had forecast an expansion of 12.8 per cent. The figures were a “sign that slowing global growth and the normalisation of consumption patterns is weighing on demand for Chinese goods”, wrote Sheana Yue, China economist at Capital Economics.
A separate report showed that German industrial output had contracted 0.3 per cent on a monthly basis in July, compared with 0.8 per cent growth in the previous month. Economists had anticipated a 0.5 per cent contraction.
The European Central Bank is due to announce its own monetary policy decision on Thursday. Multiple Wall Street banks have said they anticipate a jumbo 0.75 percentage point increase in borrowing costs. In July, the ECB raised rates for the first time in more than a decade by a sharper than anticipated 0.5 percentage points to zero.
But analysts are divided over how far and fast the ECB will move, with some fearing that higher rates will hit growth in the region. Matteo Cominetta, a senior economist at the Barings Investment Institute, anticipates a 0.75 percentage points rise on Thursday, followed by smaller rises in October and December.
“I think they’ll not be able to do any more than that because as we move into the [autumn] the evidence of a very deep recession will be clear,” he said.
Europe’s regional Stoxx 600 share index closed down 0.6 per cent. Hong Kong’s Hang Seng closed 0.8 per cent lower.
