Treasuries Extend Decline on Hawkish Fed Comments: Markets Wrap

(Bloomberg) -- US Treasuries declined after hawkish comments from Federal Reserve officials made it apparent that a policy pivot is unlikely. Stocks rose as corporate earnings continued to roll in.

The Treasury 10-year yield pushed toward 2.8% as swap markets showed traders now pricing in a 50% chance for a three-quarter percentage point rate hike in September. The 10-year rate had slumped toward 2.5% on expectation that the rate hike would be smaller. Recent data eased concerns of a broader economic slowdown as growth in the US services sector unexpectedly strengthened to a three-month high in July.

In stocks, earnings set the tone, with solid reports from PayPal Holdings Inc. and Moderna Inc. lifting the Nasdaq 100 as much as 1.9% and the S&P 500 as much as 1.1%. 

Bonds continued to sell off as investors recalibrated expectations for the Fed’s rate-hike path. Treasuries had rallied last week after Chair Jerome Powell signaled that the pace of future increases may slow later this year, boosting the odds for cuts next year in market-implied measures. Several Fed officials have since said the central bank is far from done with tightening and remains laser-focused on tamping down price gains that are the hottest in four decades.

“If there is a change in tone by Fed members, it is similar to a parent that is finally telling the kids that you’ve had enough candy, no more,” wrote Peter Boockvar, chief investment officer at Bleakley Financial Group. “For decades the Fed always gave the markets more candy, especially when the kids cried out for it. Now, the kids are going to have to do without as long as inflation is at the very unsatisfactory levels that it’s pacing at, even with an expected fall.”

Markets are also somewhat calmer after US-China tensions simmered as House Speaker Nancy Pelosi left Taiwan. Her visit had provoked an angry response from China, and markets were on the edge ahead of her arrival on Tuesday. 

US stocks are up after a session with many twists and turns on Tuesday. But equities trading doesn’t reflect the headwinds confronting the market, according to Goldman Sachs Group Inc. strategist Sharon Bell.

“There’s a little bit of complacency in there and markets are not fully taking into account the risks,” Bell said in an interview with Bloomberg TV.

Thin liquidity during the summer lull also tends to magnify small market moves, said April LaRusse, head of investment specialists at Insight Investments. 

“Sometimes that can make it look more exciting than it probably really is when you think about the volumes happening,” she said. 

The Cboe VIX Index also shows price swings are usually prevalent in the summer and early autumn. August and September are historically the two worst months for the S&P 500 Index.

Oil fell after a brief rally as traders mulled the lack of relief for oil markets and a poor demand outlook. A dollar gauge rose. 

Fed Signals

Comments from Fed officials including Mary Daly, Loretta Mester, Charles Evans and James Bullard served to highlight a challenging backdrop of rising borrowing costs, price pressures and slowing economic growth.

San Francisco Fed President Daly said the Fed has “a long way to go” on reaching price stability around a 2% inflation target. Cleveland counterpart Mester said she wants to see “very compelling evidence” that month-to-month price increases are moderating.

St Louis Fed President Bullard said in a CNBC interview Wednesday there would have to be “convincing evidence” of inflation easing before policy makers would be able to “feel like we’re doing enough.”

This week’s MLIV Pulse survey is asking about your outlook for corporate bonds, mergers and acquisitions and health of US corporate balance sheets through the end of the year. It takes one minute to participate in the MLIV Pulse survey, so please click here to get involved anonymously. 

What to watch this week:

• US factory orders, durable goods, ISM services, Wednesday
• BOE rate decision, Thursday
• US initial jobless claims, trade, Thursday
• Cleveland Fed President Loretta Mester due to speak, Thursday
• US employment report for July, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.7% as of 10:38 a.m. New York time
• The Nasdaq 100 rose 1.4%
• The Dow Jones Industrial Average rose 0.6%
• The Stoxx Europe 600 rose 0.3%
• The MSCI World index fell 0.8%

Currencies

• The Bloomberg Dollar Spot Index rose 0.3%
• The euro fell 0.3% to $1.0140
• The British pound fell 0.3% to $1.2128
• The Japanese yen fell 0.8% to 134.18 per dollar

Bonds

• The yield on 10-year Treasuries advanced five basis points to 2.80%
• Germany’s 10-year yield advanced seven basis points to 0.89%
• Britain’s 10-year yield advanced eight basis points to 1.95%

Commodities

• West Texas Intermediate crude fell 0.6% to $93.88 a barrel
• Gold futures fell 0.9% to $1,774.40 an ounce

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