(Bloomberg) – Two-year Treasury yields topped 4% for the first time since 2007, with traders awaiting the Federal Reserve’s monetary policy decision and its “dot-plot” economic forecasts, which are expected to provide a push show that they will keep interest rates higher for longer.
Shorter-dated US rates – which are more sensitive to upcoming Fed action – outperformed those with longer maturities. The S&P 500 posted modest gains, recovering from a two-month low. The dollar rose alongside gold and defense companies as Russian President Vladimir Putin stepped up his war on Ukraine and renewed warnings of a nuclear threat.
The Fed is widely expected to hike rates by 75 basis points for a third straight meeting on Wednesday, the most aggressive tightening since Paul Volcker led the central bank in the early 1980s. The decision and quarterly forecasts will be announced at 2 p.m. in Washington. Chairman Jerome Powell will hold a press conference 30 minutes later.
Read: Fed to Hike and Hammer Home Hawkish Message: Decision-Day Guide
“The consensus calls for a 75 basis point hike…and we’re in that camp,” wrote Matt Maley, chief market strategist at Miller Tabak. “The Fed would have announced a 100 basis point hike more clearly if they did something that drastic. Of course, Chairman Powell has talked a lot about Paul Volcker over the past year, so maybe he wants to shock markets the way Mr. Volcker did 40 years ago. But we still don’t expect such a surprise.”
That doesn’t mean Powell would back down any of his aggressive rhetoric, as it could damage the central bank’s credibility, according to Maley, who noted that even Fed officials who had been “fairly dovish in the past” have recently were quite aggressive.
DataTrek Research’s Nicholas Colas expects the Fed chairman to sound like he did during his Jackson Hole speech in late August: “Unapologetically determined.” While Fed fund futures are pricing in a possible rate cut or two next year, Colas noted that the central bank’s new economic forecasts could change that scenario.
“It can do a lot more by not making many rate cuts over the next year, or maybe even in 2024 to keep the yield curve high and relatively flat, than by raising rates by 100 basis points today – which can actually be counterproductive to the Inverting the yield curve and leading us all to believe there’s going to be a recession,” said Brian Nick, Nuveen’s chief investment strategist.
A poll conducted by 22V Research showed investors are split on expectations of how the market will react to the Fed’s decision and subsequent Powell conference — but they believe other people expect a risk-free outcome. About 60% of respondents expect Wednesday’s meeting to mark the “peak of hawkishness.”
Any surprise — from the magnitude of rate hikes to a hawkish shift in policy expectations as to where Fed rates may peak — could shake the stock market, according to JPMorgan Chase &. Trading desk of the Co.
Read: What to look for in today’s Fed announcement
As the Fed braces for yet another rate hike, some strategists think credit markets are too reckless about how tightening will trigger corporate defaults and hurt junk bonds and leveraged loans. And the rate hike already appears to be having an impact on weaker companies, as six US borrowers tracked by S&P Global Ratings defaulted last month – accounting for a quarter of the total for 2022.
Important events this week:
- Bank of Japan monetary policy decision, Thursday
- The Bank of England rate decision on Thursday
- US Conference Board benchmark index, Initial Jobless Claims, Thursday
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Some of the key movements in the markets:
Stocks
- The S&P 500 was up 0.6% at 12:12 p.m. New York time
- The Nasdaq 100 rose 0.5%
- The Dow Jones Industrial Average rose 0.6%
- The MSCI World Index has hardly changed
currencies
- The Bloomberg Dollar Spot Index rose 0.5%
- The euro fell 0.9% to $0.9877
- The British pound fell 0.5% to $1.1328
- The Japanese yen fell 0.4% to 144.27 per dollar
Bind
- The 10-year government bond yield was little changed at 3.57%.
- The 10-year German government bond yield fell three basis points to 1.89%
- The 10-year UK government bond yield rose 2 basis points to 3.31%
raw materials
- West Texas Intermediate Crude fell 0.7% to $83.38 a barrel
- Gold futures rose 0.3% to $1,675.30 an ounce
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