Treasuries Roiled by Powell’s Tone as Stocks Slip: Markets Wrap

(Bloomberg) -- Jerome Powell’s renewed hawkish message roiled financial markets, sending Treasury yields spiking higher as the Federal Reserve looks poised to raise interest rates sharply to tamp down inflation.

The two-year Treasury rate surged almost 20 points to its highest level since 2019, while the three-year and 10-year yields jumped by the most since March 2020 after the Fed chair said the central bank will take the “necessary steps” to get price increases under control. Stocks initially sold off as the chairman spoke, but almost erased all losses with a late-session rebound. The ructions in the Treasury market narrowed the rate spread among maturities, in a sign that the bond market is anticipating the Fed’s restrictive moves could tip the economy into recession.

“As the Fed progresses down this path of both hiking rates and shrinking their balance sheet, there will be no such thing as a soft landing,” wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group. “The only question is how much of an economic slowdown are they willing to tolerate in order to quell consumer price inflation at the same time asset price inflation deflates along with balance sheet shrinkage.”

The losses added to the question of whether last week’s stock rebound and drop in volatility would last. European equities, which were higher on Monday, have already recouped all of their losses triggered by Russia’s invasion of Ukraine nearly a month ago as the lure of cheapened valuations has drawn investors back.

Still, a historic spike in commodity prices on supply concerns shows little sign of easing, keeping traders on high alert over inflation. The war in Ukraine and resulting sanctions against Russia have sent the raw-materials markets into a tailspin, with the potential for shortages in key commodities like oil and wheat. West Texas Intermediate oil rose above $110 a barrel on Monday as Ukraine rejected a Russian demand to lay down arms and leave Mariupol. 

Meanwhile, the bond market continues to flash caution about the economy. The Treasury yield curve is flattening, and portions are inverted, which for some is an indicator of a looming economic slowdown. The 10-year U.S. yield climbed to about 2.30%, the highest in over two years.

“We do now see a higher risk of the Fed slamming the brakes on the economy as it may have talked itself into a corner,” Jean Boivin, head of markets research at BlackRock Investment Institute, wrote in a note. The cost to growth and employment could be high, if the Fed were to fully deliver on its rate path, he said.

Here are some key events this week:

• European Central Bank President Christine Lagarde among central bank speakers at the BIS innovation summit, Tuesday to March 23
• EIA crude oil inventory report, Wednesday
• Bank of England Governor Andrew Bailey, Fed Chair Powell speak at BIS panel, Wednesday
• U.K. Chancellor Rishi Sunak’s “Spring Statement” on the budget, Wednesday
• U.S. President Joe Biden attends NATO emergency summit in Brussels, Thursday
• Eurozone Markit PMIs, Thursday
• U.S. initial jobless claims, U.S. durable goods, Thursday

Some of the main moves in markets:

Stocks

• The S&P 500 was little changed as of 4:07 p.m. New York time
• The Nasdaq 100 fell 0.3%
• The Dow Jones Industrial Average fell 0.6%
• The MSCI World index fell 0.2%

Currencies

• The Bloomberg Dollar Spot Index rose 0.2%
• The euro fell 0.3% to $1.1014
• The British pound fell 0.1% to $1.3161
• The Japanese yen fell 0.3% to 119.49 per dollar

Bonds

• The yield on 10-year Treasuries advanced 15 basis points to 2.30%
• Germany’s 10-year yield advanced 10 basis points to 0.47%
• Britain’s 10-year yield advanced 14 basis points to 1.64%

Commodities

• West Texas Intermediate crude rose 7.3% to $112.34 a barrel
• Gold futures rose 0.3% to $1,940.50 an ounce

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