Global equities fell and the yield on 10-year Treasury bonds remained close to a 16-year high on Monday as concerns grew over the impact of the Federal Reserve’s message on interest rates on the US economy. The combination of rising oil prices, a potential government shutdown, and a strike by United Auto Workers against major automakers in Detroit could all slow down the US economy, which is already facing high inflation. Tim Ghriskey, Chief Investment Strategist at Inverness Counsel, stated that the increase in interest rates is making it more difficult for people to buy houses, cars, and borrow money in general.
While the market has already priced in a rate hike when the Federal Reserve concludes its two-day policy meeting on Wednesday, there is still the possibility of another hike in the future. Ghriskey believes that the Fed is unlikely to raise rates at this meeting but could potentially do so in alternating meetings unless there is a significant improvement in inflation.
The rise in oil prices is another concern for the US economy. Marc Chandler, Chief Market Strategist at Bannockburn Global Forex, stated that higher oil prices act as a tax on consumption and have historically led to economic downturns.
The benchmark 10-year Treasury yield is just below the level reached on August 22, and the two-year yield continues to rise. While there is only a 1% chance of an interest rate hike this week, the market expects the Fed to keep its overnight lending rates above 5% until late July 2024.
Global stocks also saw a decline, with MSCI’s gauge of stocks across the globe shedding 0.25% and the pan-European STOXX 600 index losing 1.05%. Societe Generale’s shares slumped 12.05% after the bank’s chief executive presented a strategic plan that disappointed investors.
In the UK, the FTSE 100 fell 0.8% due to a 6.1% drop in the automotive sector. On Wall Street, the Dow Jones Industrial Average rose slightly, while the S&P 500 and Nasdaq Composite saw minimal gains or losses.
Worries about global growth were also fueled by China’s property woes, ongoing strikes, and geopolitical tensions. China Evergrande Group, a major property developer, saw its shares plunge by 25% after some staff at its wealth management unit were detained by police. Another developer, Country Garden, faced a liquidity test with a deadline to pay $15 million in interest linked to an offshore bond.
Central banks around the world are also in focus this week, with rate-setting meetings taking place for five of the 10 most heavily traded currencies. The Bank of England is expected to raise interest rates for the 15th time on Thursday, while the Bank of Japan’s policy decision on Friday will be closely watched for any indications of a faster move away from ultra-loose policies.
In currency markets, the dollar slightly weakened against major currencies, including the euro and the yen. US crude oil rose to settle at $91.48 a barrel, while Brent crude settled at $94.43 after hitting $94.95 earlier in the day. Gold prices also rose as investors awaited central bank policy decisions.
Overall, there are growing concerns about the impact of the Federal Reserve’s interest rate message on the US economy, with rising oil prices, a possible government shutdown, and ongoing strikes adding to the uncertainties. Global markets and central banks are closely watching these developments, which could have significant implications for the future.
More detail via Kitco.com here… ( Image via Kitco.com )
