Just when US traders were trying to take a break from all the anxiety on whether Federal Reserve rate hikes will cause a recession, speculation about a tweak in policy on the other side of the world roiled markets across the board.
(Bloomberg) — Just when US traders were trying to take a break from all the anxiety on whether Federal Reserve rate hikes will cause a recession, speculation about a tweak in policy on the other side of the world roiled markets across the board.
Stocks erased gains, Treasury 10-year rates hit 4% and the yen advanced on a news report the Bank of Japan will discuss tolerating higher domestic bond yields at a scheduled meeting Friday. Wall Street’s “fear gauge”, the VIX, jumped the most since May. In late trading, Intel Corp. rose on a bullish revenue forecast.
Read: BOJ to Keep Easy Policy as Traders Wary of YCC Tweaks: Guide
With the BOJ widely expected to retain its ultra-easy policy, investor focus will now fall on whether authorities use a revision to their inflation forecast as an excuse to tweak its yield curve control program. If officials adjust YCC, markets will likely take it as the beginning of a policy tightening cycle, according to Kristina Clifton at Commonwealth Bank of Australia.
“Headlines around the potential for the BOJ to discuss widening the YCC were enough to exaggerate the selling pressure in Treasuries,” said Ian Lyngen at BMO Capital Markets. “What had been a collective expectation of unchanged policy was replaced by far more uncertainty.”
To Krishna Guha at Evercore ISI, any change to YCC would have to be very carefully managed to avoid overshooting in yields and the yen.
“But we think that in the base case, global markets may already have overreacted and over-discounted the impact of what might come,” Guha noted.
Soft Landing vs. Recession
Equities gained earlier in the day as US gross domestic product picked up steam in the second quarter, while pending home sales unexpectedly climbed in June. On Wednesday, Fed Chair Jerome Powell said his staff had ditched the recession forecast it put in place in March, when banking turmoil had raised fears about a potential credit crunch.
To Mike Loewengart at Morgan Stanley Global Investment Office, Thursday’s reports all pointed to a buoyant economy that continues to cruise despite interest rates reaching their highest levels in more than two decades.
“The Fed has been hesitant to close the door on additional rate hikes, and if today’s strong data is any indication, it may have to wait a while longer before it’s comfortable signaling this tightening cycle has run its course,” Loewengart added. “For now, the indicators are still pointing toward a relatively soft economic landing.”
Elsewhere, European Central Bank President Christine Lagarde said officials have an “open mind” on what to do next after lifting interest rates by another quarter-point on Thursday. The euro retreated.
Read: Biggest Banks Face 19% Boost in Capital Mandates in US Plan
After the Closing Bell:
- Ford Motor Co.’s profit beat expectations in the latest quarter on robust sales of its gas-fueled models even as it rushed to ramp-up electric vehicle production ahead of critical contract talks with its largest union.
- KLA Corp., one of the largest makers of semiconductor manufacturing equipment, gave a strong revenue forecast for the current period, signaling that the chip industry may be nearing a recovery.
- T-Mobile US Inc. exceeded Wall Street’s estimates for profit and mobile phone customer gains and raised its subscriber forecast for the year, a strong sign that the No. 2 carrier is using its 5G lead to gain market share from its wireless peers.
- GameStop Corp., the struggling video game retailer, said Chief Financial Officer Diana Saadeh-Jajeh resigned, effective Aug. 11.
Key events this week:
- Japan Tokyo CPI, Friday
- BOJ rate decision, Friday
- Eurozone economic confidence, consumer confidence, Friday
- US consumer income, employment cost index, University of Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 fell 0.6% as of 4 p.m. New York time
- The Nasdaq 100 fell 0.2%
- The Dow Jones Industrial Average fell 0.7%
- The MSCI World index fell 0.2%
Currencies
- The Bloomberg Dollar Spot Index rose 0.6%
- The euro fell 1.1% to $1.0967
- The British pound fell 1.2% to $1.2784
- The Japanese yen rose 0.8% to 139.12 per dollar
Cryptocurrencies
- Bitcoin fell 1.4% to $29,167.5
- Ether fell 1.1% to $1,860.76
Bonds
- The yield on 10-year Treasuries advanced 13 basis points to 4.00%
- Germany’s 10-year yield declined one basis point to 2.47%
- Britain’s 10-year yield advanced three basis points to 4.31%
Commodities
- West Texas Intermediate crude rose 1.4% to $79.85 a barrel
- Gold futures fell 1.3% to $1,982.90 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Brett Miller, Tassia Sipahutar, Sujata Rao, Isabelle Lee and Emily Graffeo.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.