After a period of heightened volatility that sent shockwaves through stock and bond markets, a semblance of calm has returned. Notably, the S&P 500 index saw a 0.3% rally, and the Nasdaq 100 posted a 0.6% gain. The Cboe Volatility Index (VIX), which had recently reached its highest level since May, has now begun to retreat. With a possible government shutdown looming at the end of the month and an auto workers strike underway, there is growing speculation that Federal Reserve officials could take a more accommodative stance.
Minneapolis Federal Reserve President Neel Kashkari articulated: “If these negative scenarios affect the American economy, then we might have to do less with our monetary policy to reduce inflation back to 2% because the government shutdown or auto strike may slow the economy for us.”
Later today, Federal Reserve Chairman Jerome Powell, along with several other central bank officials, is scheduled to address the public. While some moderation in central bank messaging is anticipated, a full reversal is considered unlikely, according to Evercore ISI’s Krishna Guha.
Yields on the 10-year Treasury bond have retreated slightly from their 16-year high, a rise fueled by speculation that the Federal Reserve will maintain tight monetary policy well into next year, or possibly longer. Demand for dollars remains strong, as indicated by its sixth consecutive day of gains, on track for its longest winning streak in a year.
For the first time since June 2021, the Federal Reserve Bank of New York’s measure of long-term debt compensation for bond investors has turned positive, suggesting a belief among traders in elevated policy rates.
On the commodities front, oil prices have resumed their rise, reaching $92 a barrel. Meanwhile, American consumer confidence has been hit by rising fuel costs and the widespread fallout from aggressive interest rate increases.
At this crucial juncture for the economy and the bond market, Bob Michele, CIO of fixed income at JPMorgan Asset Management, observed: “The last 15 years were not normal, we reached a structural minimum and now we are going to return to something that is more normal.”
This week’s key events:
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Economic confidence and consumer confidence in the eurozone (Thursday)
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US Initial Jobless Claims and GDP (Thursday)
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Federal Reserve Chairman Jerome Powell’s town hall meeting with educators, speeches by Richmond Fed President Tom Barkin and Chicago Fed President Austan Goolsbee (Thursday)
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Eurozone CPI (Friday)
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Japan unemployment rate, industrial production, retail sales, Tokyo CPI (Friday)
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US Consumer Spending, Wholesale Inventories, University of Michigan Consumer Sentiment (Friday)
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Speech by ECB President Christine Lagarde (Friday)
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Speech by New York Federal Reserve President John Williams (Friday)
Market Movement Overview:
Currency update:
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Bloomberg Dollar Spot Index: +0.2%
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Euro to USD: -0.5% ($1.0524)
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Pound Sterling to USD: -0.1% ($1.2141)
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Japanese Yen to USD: -0.2% (149.32 per dollar)
Cryptocurrency Report:
Bond Market Outlook:
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10-year Treasury bond yield: -1 basis point to 4.52%
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German 10-year yield: -2 basis points to 2.78%
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UK 10-year yield: stable at 4.32%
Commodity update:
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West Texas Intermediate crude oil: +2.4% to $92.53 a barrel
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Gold futures: -0.7% to $1,906.80 an ounce.
Also read: Wall Street eyes soft start as rate uncertainties persist