US stocks and Treasuries fell on Thursday as investors bet on higher interest rates after hawkish comments from a top US central banker.
James Bullard, chairman of the St Louis branch of the Federal Reserve, said previous interest rate hikes had “only a limited effect on observed inflation” and that the bank’s main policy rate central could increase between 5% and 5.25% at least. , above the level currently held by the markets.
Following Bullard’s comments, the two-year Treasury yield, which is particularly sensitive to interest rate expectations, rose 0.09 percentage points to 4.45%. The benchmark 10-year Treasury yield also rose 0.07 percentage points to 3.77%.
The spread between the two yields reached minus 0.71 percentage points, meaning the so-called inversion of the Treasury yield curve hit its highest level since 2000, according to Refinitiv data. Previous yield curve inversions have predated US recessions and generally signal that investors believe interest rates will dampen economic growth.
On Wall Street, the S&P 500 and the Nasdaq Composite fell 0.3%.
Some of the shift in monetary policy expectations could be seen in the futures market, where investors have now assigned a roughly 20% chance that the Fed will raise rates by 0.75 percentage points during its meeting in December, against 15% on Wednesday. The consensus, however, remains that the central bank will hike rates by 0.5 percentage points, which would end a streak of four straight increases of 0.75 percentage points.
US inflation fell to 7.7% in October, the lowest annual rate since January.
Data released on Wednesday painted a mixed picture for the US economy. Retail sales rose 1.3% in October, higher than the 1% increase predicted by economists. Another batch of data showed manufacturing output rose 0.1% in October, slightly less than the expected 0.2% increase.
London’s FTSE 100 fell 0.1% after Britain’s Chancellor Jeremy Hunt announced a £55bn ‘consolidation’ of the country’s finances and acknowledged the economy was in recession.
The regional Stoxx Europe 600 fell 0.4% and the German Dax rose 0.2%.
UK output will return to pre-coronavirus pandemic levels at the end of 2024, the Office for Budget Responsibility said, more than two years later than the fiscal watchdog estimated in March. Unemployment will rise by 505,000, from a rate of 3.5% to a peak of 4.9% in the third quarter of 2024.
The pound traded down 0.4% against the dollar at $1.186 after Hunt’s statement in parliament, recovering some of the decline from the start of the day. Gilts also recovered ground, leaving the 10-year yield to trade less than 0.01 percentage point higher at 3.2%, according to Refinitiv pricing, while the two-year yield was 0. .01 percentage point higher to 3.1%.
Data released on Wednesday showed UK inflation hit a 41-year high in October, rising from 10.1% in September to 11.1% due to rising energy prices and foodstuffs.
The reading adds to pressure on the Bank of England to raise interest rates from the current level of 3% at its next meeting in December. Silvana Tenreyro, an external member of the BoE’s monetary policy committee, however, warned last week that UK rates were already higher than they should be.
Asian stocks fell on Thursday, adding to losses from the previous session.
Hong Kong’s Hang Seng index was down 1.2%, China’s CSI 300 fell 0.4% and South Korea’s Kospi fell 1.4%. Japan’s Topix gained 0.2%.