Subtle changes in financial markets show US economy may be able to cope with higher interest rates

There is a subtle shift in some financial markets to the view that the U.S. economy may be strong enough to handle higher interest rates to help keep inflation under control.

Signs of this change in sentiment were evident in US Treasuries, where yields across the board stayed significantly higher on Wednesday, driven by 3- to 7-year rates. Meanwhile, Fed Funds traders vacillated between expectations for a 75- and 50-basis point rate hike in September, while 5-, 10- and 30-year inflation-adjusted yields all fell in the morning. was trending upward in trading. .

Over the past week, optimism that inflation is declining, as evidenced by U.S. equity indices remaining well away from their mid-June lows, and the Fed’s Sentiment has swung between pessimism that the Fed’s rate hikes to fight inflation will lead to a recession. Deeply inverted treasury curve. The July CPI report noted that the inflation driver “shows some easing,” but the still-strong US economy is now set for another 75-basis-point rate hike by the Fed. , said senior market analyst Ed Moya. OANDA Corp. for North and South America.

A better-than-expected improvement in July’s CPI data has given many hopes that inflation may peak, but the FX says sustained tightening policy by the Fed will be needed to keep price rises in check. and reinforced a darker view of interest rate markets. This is reflected in Walmart’s better-than-expected earnings and earnings in the second quarter.
Moreover, although retail sales were flat in July, the data contained enough good news kernels to satisfy the optimists.

“The economic outlook has changed,” Moya said by phone. “June and he saw a slowdown in July, but no. Walmart and retail sales support the positive outlook this week.”

Indeed, financial markets have continued to absorb a string of data since the release of the August 10th consumer price index, which sustains inflation concerns. This includes Wednesday’s report that annual consumer prices in the UK rose 10.1% in July. Meanwhile, oil futures rose for the first time in four trades on Wednesday. According to Stifel, between July 18th and August 5th, his online survey of 70 corporate executives, business owners and private equity investors found that 50% were predictable. “extremely concerned” about the impact of future inflation. & Co.

“The theme of rising inflation continues to plague developed markets and is likely to continue this year,” said Ian Lingen, strategist at BMO Capital Markets.

Still, the recent shift in sentiment reflects a correction from the second quarter, when fears of an imminent US recession dominated. Fears of a recession have not completely disappeared. Indeed, the US Treasury curve still sounds alarming through a large negative spread between 2-year and 10-year rates. But behind the worrisome signs is also the fact that traders are largely pricing in the possibility of a rate cut by the Fed next year.

Nikko Asset Management chief global strategist John Bale said: “Surprisingly, there has been little notice or comment on the fact that hopes for a 2023 Federal Reserve rate cut have all but disappeared recently. “Certainly, Fed Funds futures once predicted a rate cut in the first half of the year, but now they are partially pricing in a rate hike, only predicting less than 25 basis points of rate cuts in 2023. is likely due to hawkish Fed speeches rather than changes in macroeconomic fundamentals.”

The recent rally in stock markets and the resulting loosening of financial conditions are also likely to play a role in expectations that the Fed will not need to cut rates, Vail wrote in an email. “This supports our view that the Fed will need to be more hawkish than consensus due to the stickiness of core inflation and, if properly perceived, will likely be a headwind for risk markets,” the strategist said. I will,” he said.

As of Wednesday, all three major stock indices are DJIA,


It fell ahead of the release of July’s Federal Reserve minutes. Meanwhile, selling government bonds pushes the 2-year yield TMUBMUSD02Y higher,
Over 3.3%, 10 year yield TMUBMUSD10Y,
Up to 2.9%.

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