EconomyUS stocks rise and government bonds sell off as...

US stocks rise and government bonds sell off as traders anticipate rate rises

Wall Street stocks rose on Tuesday and US government bond prices fell, as investors looked ahead to tighter monetary policy from the Federal Reserve.

The S&P 500 index rose 1.1 per cent as investors balanced remarks from Fed chair Jay Powell about the need for rapid interest rate rises with his reassurance that tightening would not spark a recession. The tech-heavy Nasdaq Composite added 2 per cent.

Meanwhile, the yield on the benchmark 10-year US Treasury note rose 0.09 percentage points to 2.38 per cent — the highest level since May 2019 — as its price fell.

Powell said on Monday that the Fed should move “expeditiously” towards tighter monetary policy. He also pushed back on concerns that this would cause a recession, citing episodes in 1965, 1984 and 1994 when the central bank slowed an overheated economy without prompting a sharp contraction.

“The bond market is responding to expectations of tighter monetary policy, but equity markets are saying if Powell is confident about the growth outlook then risk assets will do well,” said Seema Shah, global investment strategist at Principal Global Investors.

“Equity markets responding in this way is a bit surprising,” she added. “One of these views is going to give at some point.”

Not all investors were persuaded that the Fed’s tough talk would translate into policy decisions, which potentially could explain the continued support for equities.

“This is a Fed that is talking very hawkish and getting the market to do their dirty work for them,” said Andy Brenner, head of international fixed income at NatAlliance Securities. “I do not think that this is an aggressive Fed.”

Tesla rose 7.9 per cent on Tuesday after the electric carmaker opened a plant in Germany, pushing its market capitalisation back above $1tn for the first time since January.

Europe’s regional Stoxx 600 share index, which remains about 6 per cent lower for the year, ended the day 0.8 per cent higher, with strong gains for financial stocks. Bundesbank president Joachim Nagel said on Monday that the European Central Bank should raise interest rates this year if the inflation outlook warranted it. Germany’s Xetra Dax closed up 1 per cent and London’s FTSE 100 gained 0.5 per cent.

The US Treasury market is experiencing its worst month since 2016 after the Fed raised interest rates last week for the first time since 2018. US consumer price inflation soared to a 40-year high of 7.9 per cent last month.

Russia’s invasion of Ukraine has prompted sharp jumps in the prices of commodities from oil to wheat, exacerbating inflationary pressures caused by resurgent demand following coronavirus shutdowns and prompting markets to predict the Fed will raise its key interest rate to more than 2 per cent by December.

“Inflation expectations for the next one to two years are now extremely high,” said Brian Nick, chief investment strategist at Nuveen. “But the scenario where the Fed goes ahead and does what it is signalling it will do is probably the best-case scenario,” he added. “Do too little and inflation becomes further entrenched.”

The 10-year German Bund yield, a barometer for eurozone borrowing costs, rose 0.04 percentage points to 0.5 per cent, its highest level since October 2018.

Brent crude settled 0.1 per cent lower on Tuesday at $115.48 a barrel, with the international oil benchmark still nearly 20 per cent higher since February 23, the day before Russia invaded Ukraine.

Hong Kong’s Hang Seng index gained 3 per cent. It began to rally last week when Chinese vice-premier Liu He made a rare intervention to pledge state support for the economy and capital markets.

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