Yields rise as Powell signals "higher for longer"
Summary
Treasury yields are on the rise as stronger-than-expected economic data and geopolitical factors continue to create uncertainty across markets. Chair Powell has signaled "higher for longer' in his speech at the Economic Club of New York, two weeks before the next Fed meeting.
Treasury yields peaking
Treasury yields have risen to levels not seen since 2007, with the 10-year and the 2-year closing at 4.91% and 5.07%, respectively. Stronger-than-expected economic data, geopolitical factors, and "Fed speak" from last week are all to thank for the spike in yields. On the data front, U.S. retail sales increased 0.7% in September, meaning consumers are still spending despite high rates. Housing starts jumped 7%, the U.S. added 336K jobs and industrial production rose 0.3% in September — all indicators pointing to a healthy, robust economy.
Powell signaling "higher for longer"
Federal Reserve Chair Jerome Powell acknowledged the resilience in the economy in last Thursday’s speech at the Economic Club of New York and stated that “additional evidence of persistently above-trend growth… could put further progress on inflation at risk and could warrant further tightening of monetary policy.” Chair Powell recognized that there has been progress toward the Fed’s dual mandate goal, but inflation is still too high. This begs the question: will the Fed increase rates? Market participants expect it’s unlikely… at least at the next Fed meeting. Powell mentioned that “it will take some time and some patience, and that we’ll need to keep rates higher for longer.” Additional Fed officials have recently stated the same, signaling a holding pattern to see the effects of higher rates. The market is also anticipating that the federal funds rate will remain constant, at 525–550 bps, at the November meeting.
Geopolitical factors still playing their part in market volatility
Last week, U.S. Rep. Jim Jordan won the subsequent vote for the Republican party’s nomination as Speaker of the House. After three rounds of voting, however, Jordan had not successfully received the votes necessary to take the position. Friday afternoon, Jordan was ousted as Speaker nominee during a secret ballot session. A candidate forum will be held this evening and voting to pick a new nominee will take place tomorrow. The vacancy has the House of Representatives at a standstill, which is a cause for concern considering the wars in Israel and Ukraine and the looming government funding decision in November.
We continue to monitor the Israel-Hamas war and its impact on the markets. Crude oil continues its volatile path, reaching as high as $89.48/ barrel, as investors worry of the rippling effects that the war could have across the Middle East. The dollar remains strong against major currencies and gold prices are at their highest levels in over three months, as the market looks to safe-haven assets. We expect volatility to be a common theme across markets as the war continues to unravel.
Looking ahead
Market participants should continue to monitor geopolitical factors for any impact on the markets. On Thursday, the European Central Bank will determine their interest rate decision, and we also get MoM durable goods data, as well as QoQ GDP. We end the week with Personal Income and Personal Spending MoM and most importantly, Core PCE, which is the Fed’s preferred inflation measure.
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