WASHINGTON, Sept. 2 — The yield on the benchmark 10-year US Treasury note climbed to its highest level in over a year on Tuesday, as investors positioned for an imminent interest rate hike by the Federal Reserve. The bottom line: traders are now pricing in a significant chance of a rate increase at the next Federal Open Market Committee meeting, according to the CME Group’s FedWatch tool.
The repricing follows a run of stronger-than-expected economic data, including a consumer price index that rose above the Fed’s 2% target for the 12 months ended recently, alongside a robust jobs report that showed solid nonfarm payroll gains and a falling unemployment rate. US stocks drifted lower in response.
The Dow Jones Industrial Average fell, the S&P 500 declined, and the Nasdaq Composite dropped, as higher borrowing costs threaten corporate profits. The technology sector led the declines, with major names such as Apple, Microsoft, and Alphabet each losing more than 1% of their market value. Investors will note that tech stocks are particularly sensitive to rate changes due to their reliance on future cash flows.
The dollar strengthened against a basket of major currencies, with the ICE US Dollar Index rising, as higher yields attract foreign capital. In the corporate bond market, the spread between investment-grade bonds and Treasuries widened, indicating increased caution among credit investors.
A hawkish pivot
The bond market’s anticipation of a hawkish pivot comes after months of the Fed holding its benchmark federal funds rate in a range, following a series of consecutive rate hikes that began in a prior year. Fed Chair Jerome Powell, in his most recent public remarks, signaled the central bank is “prepared to adjust policy as appropriate” to ensure inflation returns to its 2% objective, but he did not provide a specific timeline.
Economists at Goldman Sachs and JPMorgan Chase have revised their forecasts, now projecting a rate hike at the upcoming FOMC meeting, with the possibility of further increases later in the year.
Global repercussions
The move had global repercussions. European and Asian government bond yields rose in tandem, with the German 10-year Bund yield climbing and the UK’s 10-year Gilt yield also higher. In Asia, Japan’s 10-year government bond yield, which is capped by the Bank of Japan’s yield curve control policy, edged up near its upper limit.
The prospect of higher US rates weighed on emerging market currencies and stocks, as capital flows reversed from riskier assets. The MSCI Emerging Markets Index fell, and the currencies of countries such as Brazil, India, and South Africa depreciated against the dollar.
The figure that matters now: the Fed faces a delicate balance between curbing inflation and supporting economic growth, as the US economy shows signs of slowing. GDP growth in the second quarter came in at an annualized rate below the first quarter’s pace. Despite the stock market’s decline, some analysts argue the economy remains resilient, citing strong corporate earnings, with a majority of S&P 500 companies beating analyst expectations in the most recent earnings season.
Market participants are closely watching upcoming economic data, including the next CPI report and retail sales figures, for further clues on the Fed’s policy path. The central bank’s decision and its forward guidance will shape investor sentiment and asset prices globally.
