NEW YORK/LONDON- Global equities edged up and a key part of the Treasury yield curve inverted further on Friday, a sign the US economy will stall next year and that investors hope will lead the Federal Reserve to back off its aggressive hiking of interest rates.
Surprisingly strong retail sales data this week hammered home the idea that the Fed will tighten monetary policy further even though soft consumer and producer price pressures suggested inflation has peaked and would allow for lower rates.
Treasury yields rose for a second day following hawkish comments on Thursday by St. Louis Fed President James Bullard, who said rates needed to rise to a range between 5 percent and 5.25 percent to be “sufficiently restrictive” to curb inflation.
The remarks were a blow to investors who had wagered rates would peak at 5 percent or below. Futures now show the Fed funds rate at 5.04 percent by May, up from 3.83 percent nowBut futures also show rates will slide to 4.57 percent in December 2023 on expectations the Fed will move 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 waning policymakers may need to deliver another 75-basis point rate hike to get inflation under control.
Three top policymakers in Europe also said that the European Central Bank must raise rates high enough to dampen growth as it too fights 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 often has made the point, ‘we’re concerned that if you let up too quickly, that you’ll have a second surge of inflation,’ and that’s not something they want to repeat,” Mullarkey said.
The market sees a recession next year as the yield spread between two- and 10-year Treasuries was almost -70 basis points, an inversion of the yield curve that last reached such deep levels in 2000.
