- Most inverted U.S. yield curve since 1981
- MSCI global shares up 0.2%, weekly eye loss
NEW YORK/LONDON, Nov 18 (Reuters) – Global stocks edged higher and a key part of the Treasury yield curve inverted further on Friday, a sign that the U.S. economy will stagnate next year and investors hope to induce the Federal Reserve to back off its aggressive interest rate hike.
Surprisingly strong retail sales data this week hammered home the idea that the Fed will tighten monetary policy further, even as muted pressures on consumer and producer prices suggest inflation has peaked and would allow lower rates.
Treasury yields rose for a second day following hawkish comments Thursday from St. Louis Fed President James Bullard, who said rates needed to rise to a range between 5% and 5.25% to be “sufficiently restrictive” to curb inflation.
The remarks were a blow to investors who had bet rates would peak at 5% or lower. Futures contracts now show the fed funds rate at 5.04% in May, down from 3.83% currently . But futures also show rates falling to 4.57% in December 2023 on expectations that the Fed is poised to ease policy as the economy weakens.
Boston Fed President Susan Collins added to the Fed’s hardline stance, telling CNBC that with little evidence price pressures are easing, policymakers may need another rate hike. 75 basis points to control inflation.
Three senior European politicians have also said the European Central Bank needs to raise rates enough to dampen growth, as it is also battling high inflation.
“Where we think the market is getting it wrong is pricing in rate cuts next year,” said Dec Mullarkey, managing director of investment strategy and asset allocation at SLC Management. .
Fed Chairman Jerome “Powell has often argued that ‘we’re worried that if you ease off too quickly you’ll have a second bout of inflation,’ and that’s not something they want to repeat. “, Mullarkey said.
The market faces a recession next year as the yield spread between two- and ten-year Treasuries was nearly -70 basis points, an inversion of the yield curve that reached levels as deep for the last time in 2000.
When yields are lower on the 10-year note than on the two-year note, a security that reflects interest rate expectations, it suggests a slowdown or worse and that the Fed will cut rates to boost inflation. economy.
The yield on the two-year note rose 5.1 basis points to 4.505%, well above the yield on the 10-year note, which rose 3.9 basis points to 3.812%.
The MSCI Global Equity Index (.MIWD00000PUS) rose 0.18% but was heading for a loss of around 0.8% on the week, after hitting recent two-month highs. The Pan-European STOXX 600 Index (.STOXX) 1.16%, its best single-day performance in a week.
Inflows into global equity funds hit their highest level in 35 weeks in the week ending Wednesday, according to a report from Bank of America (BofA), as investor optimism intensified.
The shares traded little or fell on Wall Street. The Dow Jones Industrial Average (.DJI) rose 0.17%, the S&P 500 (.SPX) gained 0.02% and the Nasdaq Composite (.IXIC) fell 0.51%.
Eurozone banks are expected to repay 296 billion euros in multi-year loans to the European Central Bank, the ECB announced on Friday.
The amount is less than the half-trillion euros analysts expected, but remains the biggest drop in excess liquidity since records began in 2000.
The yield on the German 10-year government bond, the eurozone benchmark, was 2.012%.
The euro fell 0.36% to $1.0323, after hitting a four-month high of $1.0481 hit on Tuesday as some policymakers pleaded for caution on tightening.
The yen weakened 0.14% against the dollar to 140.38.
Chinese blue chips (.CSI300) fell 0.45% amid reports that Beijing had asked banks to check bond market liquidity after soaring yields caused losses for some investors.
There were also fears that a rise in COVID-19 cases in China could jeopardize plans to ease tough movement restrictions that have strangled the economy.
The Japanese Nikkei (.N225) fell 0.1% as data showed inflation hit a 40-year high as a weak yen fueled import costs.
Oil fell more than $3 a barrel and was on track for a second weekly decline, under pressure from concerns over weakening demand in China and further increases in US interest rates.
U.S. crude futures fell $1.56 to settle at $80.08 a barrel.
US gold futures fell 0.5% to $1,754.4 an ounce.
Bitcoin fell 0.65% to $16,577.00.
Reporting by Herbert Lash, additional reporting by Carolyn Cohn in London, Wayne Cole in Sydney and Lisa Mattackal in Bangalore; Editing by Sam Holmes, Simon Cameron-Moore, Louise Heavens, Philippa Fletcher
Our standards: The Thomson Reuters Trust Principles.
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