Time Is Ticking For Central Banks
After last week's hawkish central bank chorus, ten-year Treasury rates are already up 8 basis points this week, leading a worldwide surge up in government borrowing costs.
The movement in inflation breakevens, which represents bond market predictions of future price rise, is even more intriguing. Ten-year breakevens in the United States climbed about 5 basis points yesterday, and are up 10 basis points in the last week. Those changes are also being observed in most of the developed world, including Germany and the United Kingdom.
TINA: There Is No Alternative?
The hikes in yields, according to investors, are insufficient to disrupt the TINA narrative that has kept the stock market surge continuing.
Yet, Wall Street is down, particularly those for Nasdaq, whose tech-heavy companies suffer more when rates increase. European equities also fell to their lowest level in a week as a rise in government bond rates dragged down high-growth technology firms, dragging on investor mood amid further signs of a slowdown in China's economy.
Bumpy Road In China
Meanwhile, profit growth at China's industrial businesses declined for the sixth month in August, indicating that the country's output and earnings are under threat from a developing power crisis.
“The pandemic situation remains unresolved. The Chinese economy is slowing and authorities have yet to stimulate forcefully. The Fed is preparing to normalize policy. And the debt ceiling showdown is ongoing, [...] Heightened uncertainty combined with elevated speculation suggests that the near-term path will be bumpy.” BCA Research by Sruthi Shankar for Reuters
- Lasting effects of the pandemic such as labor shortage and supply chain hurdles are causing prices to rise and inflation expectations to pick up
- These are forcing central banks across the world to take a more hawkish stand and gradually raise rates
- Going forward, we expect rates to gradually rise in a prudent manner as central banks try to find a balance between employment advances and inflation
- In the longer term however, we expect inflation to continue to be subdued as supply chain hurdles get cleared and labour issues are solved (in part by the drive for automating jobs)
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