Fed hawkishness spooks global stocks, UK yields surge

July 06, 2023 (MLN): Global stocks dropped as global markets responded to Federal Reserve commentary that was more hawkish than expected, UK government bonds also fell, Bloomberg reported.

European and Asian stocks saw broad declines, while contracts on the S&P 500 pointed to a continuation of Wednesday’s losses on Wall Street.

In the UK, yields on 10-year government bonds climbed to the highest since the gilts crisis last October, when then Prime Minister Liz Truss’s fiscal plan unnerved markets. Traders are now fully pricing a terminal Bank of England rate of 6.5% by March, the highest level in a quarter century, according to interest-rate swaps data.

Tightening policy also remains an investor concern for the US. Minutes from the June Fed meeting showed division among policymakers over the decision to pause rate hikes, with the voting members on track to take rates higher this month. Traders are also looking ahead to US jobs data this week that will further illuminate the path for policy.

“It’s very difficult for the Fed to be pivoting anytime soon,” said Sue Trinh, co-head of global macro strategy for Manulife Investment Management, on Bloomberg Television. Prior pivots have occurred with core inflation around half current levels, suggesting more tightening ahead, she said. “We are positioned somewhat more defensively in the shorter term.”

A number of US employment reports will be closely watched this week. The so-called JOLTS report of job openings is expected to show a tapering of available positions and a separate measure of jobless claims is anticipated to tick higher, in a sign of cooling in the labor market. After that, attention turns to Friday’s closely watched monthly nonfarm payrolls report.

Treasury yields rose across the curve, adding to gains on Wednesday spurred by the Fed minutes. The policy sensitive two-year rate inched up to 4.96%.

Meanwhile, Treasury Secretary Janet Yellen touches down in Beijing Thursday to attempt to further repair the relationship between the world’s two largest economies.

Elsewhere in China, the central bank extended support for the yuan via a stronger daily reference rate, a day after its flagship newspaper published commentary stating that the country has ample tools to stabilize the weakening currency. Other efforts to shore up the yuan included a decision among China’s largest banks to reduce rates on the country’s $453 billion in corporate US dollar deposits — the second cut in a matter of weeks.

Chinese investors don’t expect policymakers to unveil aggressive stimulus or big economic reforms at a key meeting expected later this month, according to Goldman Sachs Group Inc. Traders have been hoping for more after a slew of disappointing data.

“Our base case is a weak stimulus,” Bank of America Corp. strategists including Winnie Wu wrote in a note. “We believe the government will need to send clearer signals to support the economy and private sectors, to help rebuild confidence.”

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