Global stocks rise, US bond yields hover at 8-week highs ahead of Jackson Hole
Better-than-expected economic data in Germany and gains in U.S. mega-cap growth stocks helped push world stock markets broadly higher on Thursday as investors awaited the Federal Reserve’s annual Jackson Hole symposium for to gain insight into the central bank’s plans to combat inflation.
The start of the Federal Reserve’s annual monetary policy conference begins Friday in Jackson Hole, Wyoming. The focus is squarely on how much higher US interest rates might have to go and stay high if inflation does not fall significantly from current 40-year highs.
“It’s all treading water until we get what Fed chief (Jerome) Powell has to say in Jackson Hole,” said Saxo Bank’s head of currency strategy, John Hardy.
GDP data from Europe’s largest economy, Germany, also brought relief. News that the country narrowly avoided a recession in the second quarter and better than feared confidence data briefly lifted the battered euro back above dollar parity.
The euro fell back below $1 as details from last month’s European Central Bank meeting – where it raised interest rates by 50 basis points (bps) – showed concern among policymakers that inflation is becoming entrenched. Read more
MSCI’s measure of shares across the globe (.MIWD00000PUS) rose 0.51% after gains in Europe and Japan.
On Wall Street, the Dow Jones Industrial Average (.DJI) rose 36.84 points, or 0.11%, to 33,006.07; The S&P 500 (.SPX) rose 19.74 points, or 0.48%, to 4,160.51; and the Nasdaq Composite (.IXIC) added 73.86 points, or 0.59%, to 12,505.39.
Borrowing costs in bond markets also eased slightly after a hectic few days that saw another sharp rise, particularly in Europe, where gas prices have now more than tripled since June as Russia cut its supply.
Germany’s 10-year yield fell about 3 basis points (bps) to 1.33% after touching 1.39%. Italy’s 10-year yield edged down to 3.58% and US yields, the main driver of global borrowing costs, hovered near an eight-week high of 3.10%, compared with 2.51% at the start of month.
Investors have scaled back expectations that the Fed could tip to a slower pace of rate hikes as US inflation remains at 8.5% year-on-year, well above the Fed’s 2% target. But Powell’s speech on Friday will be scrutinized for any indication that an economic slowdown could change the Fed’s strategy.
Investors now expect the Fed Funds rate to peak at 3.80% in March 2023, up from 3.62% a fortnight ago, said Tapas Strickland, NAB’s chief financial officer.
“Given the extent of this week’s selloff so far, a hawkish takeaway from Wyoming appears to be the consensus and arguably priced in with some confidence,” said Ian Lyngen, head of US Rates Strategy at BMO Capital Markets.
Interest rate futures imply a 60% chance of a 75bp Fed hike in September, up from 50% earlier this week. Eurozone money markets are now pricing in around 100 bps of ECB rate hikes in October, including a slim chance of 75 bps moves next month.
“Equity markets are currently viewing bad news about the economy as fundamentally good news because to them it means the Fed may not be tightening as much as thought,” said Rob Subbaraman, Nomura’s head of global macro research.
“But equity markets may have to reevaluate that after Jackson Hole.”
In currency markets, the dollar fell 0.25% after being as much as 0.5% earlier, including 0.4% against the euro, to 136.62 yen. China’s yuan also moved away from a two-year low.
US crude recently fell 0.03% to $94.86 a barrel and Brent was at $101.83, up 0.6% on the day.
Deutsche Bank strategist Jim Reid said the concern was that the energy situation in Europe continues to worsen.
“It raises fears that ‘peak inflation’ may not have been reached yet for some countries,” he said. “Policymakers face some enviable choices as they grapple with the worst stagflation we’ve seen in decades.”