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Fed's Hawkish Remarks Sink in, Bonds Fall, Dollar Rallies

September 25, 2023
minute read

Government bonds faced declines while stock markets stabilized, driven by trader expectations that central banks would maintain elevated interest rates to counter inflationary pressures. Simultaneously, the dollar reached its highest point since March, reflecting investor preferences for safe-haven assets.

The S&P 500 and the technology-focused Nasdaq 100 exhibited marginal fluctuations as traders resumed activities following Wall Street's most substantial weekly selloff since March. Notably, Netflix Inc. saw a 0.8% increase, leading film and television production companies higher. This surge followed a tentative labor agreement reached by Hollywood screenwriters. Conversely, Foot Locker Inc. and Nike Inc. encountered declines subsequent to downgrades by Jefferies analysts, who cited looming challenges in consumer sentiment.

The yield on the 10-year US Treasury note surged by nine basis points, reaching a peak of 4.53%, a level unseen since 2007. Dollar Spot Index extended its ascent for the fourth consecutive day, inching closer to its year-to-date high.

Following last week's sequence of central bank decisions, mounting concerns among traders revolve around the potential of rising oil prices exacerbating inflationary pressures. This concern may hinder policymakers from implementing rate reductions in the near future. Hedge funds are increasing their exposure to oil, betting on tightening supplies to stimulate demand.

Austan Goolsbee, Head of the Federal Reserve Bank of Chicago, expressed optimism that the US could evade a recession, labeling it the "golden path." However, he acknowledged the presence of numerous risks and a complex path ahead in an interview on CNBC.

Two Federal Reserve officials conveyed the possibility of at least one more rate hike, indicating the potential need for a prolonged period of higher borrowing costs to counteract inflation and steer it back towards the central bank's 2% target. While Boston Federal Reserve President Susan Collins noted that further tightening remains a possibility, Governor Michelle Bowman signaled that multiple rate increases might be necessary.

Elevated oil prices and a substantial fiscal deficit have driven losses in government bonds, propelling Treasury yields across various maturities to levels not witnessed in over a decade. Strategists at Bank of America Corp. predict that the 10-year Treasury yield may climb to 4.75% before a combination of reduced risk appetite and stricter financial conditions prompts a decline towards the end of the year.

Meanwhile, China's property developers are generating fresh concerns, exemplified by China Evergrande Group's decision to cancel a creditor meeting. This action intensifies apprehensions regarding the company's substantial debt burden, further fueling worries that China's economic slowdown may impede global economic growth.

Bryan Curtis
Eric Ng
John Liu
Editorial Board
Bryan Curtis
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

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