Global equities weakened and government bond yields rose Monday after central bankers warned investors to prepare for an extended period of higher interest rates.
Policymakers from the US Federal Reserve and European Central Bank used speeches at last week’s annual meeting in Jackson Hole, Wyoming, to reiterate their commitment to fighting inflation, despite the risk of the economy drifting into recession.
Wall Street’s benchmark S&P 500 stock index fell 0.7 percent Monday, exacerbating losses after a sharp drop when Fed Chair Jay Powell spoke last Friday. The tech-dominated Nasdaq Composite lost 1 percent.
US Treasury bond prices, which had been more muted in the immediate aftermath of Powell’s speech, fell more sharply on Monday. The yield on the two-year bond, which is particularly sensitive to short-term interest rate expectations, reached 3.48 percent — the highest level since 2007 — before retreating to 3.43 percent, up 0.03 percentage points for day. Bond yields rise when prices fall.
The benchmark interest rate on ten-year government bonds rose by 0.07 percentage point to 3.11 percent.
The impact of Powell’s aggressive speech, warning that the Fed “must hold out until the job is done,” was also reflected in the Vix Volatility Index, a measure of expected swings in US stocks commonly referred to as Wall. Street’s “anxiety meter”. The Vix rose to 27.7, its highest since mid-July.
“Officials remain strongly committed to bringing inflation back to the central bank’s target of 2 percent,” said Mansoor Mohi-uddin, chief economist at Bank of Singapore. “We think the likelihood of a 0.75 percentage point move has increased next month and will keep an eye on U.S. payrolls and August inflation data.”
Several leading European policymakers also warned that monetary policy in the eurozone would have to remain tight for an extended period of time.
The continent’s major stock indices fell, but recovered somewhat from their early lows. The benchmark Euro Stoxx 600 was 0.8 percent weaker. Germany’s Dax fell 0.6 percent and Paris’ Cac 40 fell 0.8 percent. London was closed for a public holiday.
The Japanese benchmark Topix led the markets in Asia lower with a decline of 1.8 percent. The Hang Seng fell 0.7 percent.
Italy’s 10-year yield rose 0.12 percentage points to 3.79 percent, approaching the 4 percent threshold seen by many as the point where debt is beginning to look unsustainable.
The Japanese yen fell 0.8 percent to ¥138.70 against the dollar. The pound fell 0.4 percent to $1.17, reaching its lowest level against the dollar since the early days of the coronavirus pandemic, after Goldman Sachs lowered its economic growth forecast for the UK to 3.5 percent, from 3.7 percent earlier.
Additional reporting by Martin Arnold in Frankfurt
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