US stocks and Treasuries fell on Thursday as investors bet on higher interest rates after hawkish commentary from a senior US central banker.
James Bullard, president of the St Louis branch of the Federal Reserve, said previous interest rate rises had “only a limited effect on observed inflation” and that the central bank’s main policy rate could increase to between 5 per cent and 5.25 per cent at least, above the level currently priced in by markets.
Following Bullard’s comments, the two-year Treasury yield, which is particularly sensitive to interest rate expectations, rose 0.09 percentage points to 4.45 per cent. The benchmark 10-year Treasury yield also rose 0.07 percentage points to 3.77 per cent.
The gap between the two yields reached minus 0.71 percentage points, meaning the so-called Treasury yield curve inversion has reached its widest level since 2000, according to Refinitiv data. Previous yield curve inversions have preceded US recessions and typically signal that investors believe interest rates will crimp economic growth.
On Wall Street, the S&P 500 index and the Nasdaq Composite fell 0.3 per cent.
Some of the shift in monetary policy expectations could be seen in the futures market, where investors have now assigned a roughly 20 per cent chance that the Fed will raise rates by 0.75 percentage points when it meets in December, up from a 15 per cent chance on Wednesday. The consensus, however, remains that the central bank will raise rates by 0.5 percentage points, which would end a run of four consecutive 0.75 percentage point increases.
US inflation inched down to 7.7 per cent in October, the lowest annual rate since January.
Data out on Wednesday painted a mixed picture of the US economy. Retail sales rose 1.3 per cent in October, higher than the 1 per cent rise forecast by economists. Another batch of data showed manufacturing output rose 0.1 per cent in October, slightly less than the 0.2 per cent increase predicted.
London’s FTSE 100 fell 0.1 per cent after UK chancellor Jeremy Hunt announced a £55bn “consolidation” of the country’s finances and acknowledged the economy was in recession.
The regional Stoxx Europe 600 fell 0.4 per cent and Germany’s Dax rose 0.2 per cent.
UK output will return to pre-coronavirus pandemic levels at the end of 2024, the Office for Budget Responsibility has said, more than two years later than the fiscal watchdog estimated in March. Unemployment will increase by 505,000, rising from a rate of 3.5 per cent to peak at 4.9 per cent in the third quarter of 2024.
Sterling traded 0.4 per cent lower against the dollar at $1.186 after Hunt’s statement to parliament, recouping some of the decline from earlier in the day. Gilts also recovered ground, leaving the 10-year yield trading less than 0.01 percentage points higher at 3.2 per cent, according to Refinitiv pricing, while the two-year yield was 0.01 percentage points higher at 3.1 per cent.
Data out on Wednesday showed UK inflation surged to a 41-year high in October, accelerating to 11.1 per cent from 10.1 per cent in September owing to rising energy and food prices.
The reading adds to pressure on the Bank of England to raise interest rates from the current level of 3 per cent when it next meets in December. Silvana Tenreyro, an external member of the BoE’s Monetary Policy Committee, warned last week that UK rates were already higher than they needed to be, however.
Asian equities fell on Thursday, adding to losses in the previous session.
Hong Kong’s Hang Seng index was down 1.2 per cent, China’s CSI 300 slipped 0.4 per cent and South Korea’s Kospi fell 1.4 per cent. Japan’s Topix gained 0.2 per cent.
