After a positive start to the week, US equity futures took a hit as bond yields rose across the curve, indicating that the recovery from last week’s selloff will prove difficult.
The sharp rise in yields over the past few days reflects investors’ perceptions of the Federal Reserve’s hawkishness and another sign that interest rates could start to rise, by 50 basis points from 25, when it was held. next meeting.
US 10-year yields rose six basis points in Asian trade, hitting almost 2.78%. The benchmark has only traded above 3% twice in the past decade, and very few have seen it in 2022. Meanwhile, real interest rates are rapidly approaching territory. positive, with the US 10-year TIPS trading at -0.11% at the time of writing.
It is certainly a very difficult time for investors. The fight against inflation is and will remain the main driver of market developments, and this week there is a lot of fresh data to digest.
US inflation released on Tuesday is expected to have risen 8.5% over the past year, 0.6% above the previous 40-year high of 7.9% in February. The March inflation figures will start to reflect the impact of the Russian-Ukrainian war on prices and given that there is no sign that this war will end soon, they are likely to remain high. There is nothing the Fed can do to control the inflation produced by sanctions on Russia or supply bottlenecks with new Chinese lockdowns. But policymakers have no choice but to get more aggressive in tightening policies as inflation spins out of control.
As in the United States, the British are struggling with rising inflation. It could even be worse in the UK, as a higher cap on energy prices will be introduced this month. The UK CPI release on Wednesday will be closely watched for the Bank of England’s next move.
While the Bank of Canada and the Reserve Bank of New Zealand are both expected to raise rates this week, the ECB is likely to hold its own. However, will the European Central Bank end its bond purchases sooner or will it stick to the third quarter? This could indicate when the ECB is ready to raise rates.
In theory, this environment of rising interest rates is favorable to the financial sector, particularly banks. However, they are expected to post lower profits of more than 30% in the first quarter given the drop in mergers and acquisitions activity, IPOs and transactions. Higher interest rates are always good for retail banking if they don’t lead to a recession, so it will be interesting to watch earnings announcements from major US banks this week.