April 11, 2022

Treasuries, Stocks Sink on Inflation, Policy Risks: Markets Wrap

  • U.S. 10-year yield touches 2.77%, tops rate on Chinese debt
  • Dollar up, oil drops; Asia shares at lowest since mid-March

Treasuries, stocks and U.S. equity futures slid Monday amid heightened worries about inflation risks and tightening financial conditions. A gauge of the dollar climbed.

The 10-year Treasury yield touched 2.77%, exceeding the equivalent rate on Chinese debt for the first time since 2010. Real U.S. yields are getting closer to turning positive, a development that could be an impediment for risk assets.

An Asia-Pacific equity index shed more than 1%, dropping to the lowest since mid-March. China and Hong Kong were in the red, weighed down by the mainland’s Covid outbreak, elevated Chinese factory-gate prices and regulatory concerns in the technology sector.

U.S. and European futures also declined, pointing to more challenges for global shares after the Federal Reserve last week signaled sharp interest-rate hikes and balance-sheet reduction to curb price pressures.

Oil retreated on risks to demand from China’s Covid lockdowns, including extensive curbs in Shanghai.

Market sentiment continues to be shaped by a hawkish Fed, commodity-market disruptions caused by Russia’s invasion of Ukraine and the prospect of an economic slowdown. China’s Covid curbs threaten to exacerbate supply-chain snarls, further stoking inflation risks. The nation’s factory gate prices increased more than expected in March.

“Today, the mantra for many investors is ‘Don’t fight the Fed when it is fighting inflation,’” Ed Yardeni, president of Yardeni Research, wrote in a note. “We agree with that, but it’s not as bearish as it sounds” in part because accumulated excess liquidity and an inflation boost to earnings are props for stocks, he added.

Cleveland Fed President Loretta Mester said she’s confident that the U.S. will avoid a recession as the Fed tightens policy, though the inflation rate will probably remain at more than 2% into next year.

Yen, Euro Swings

The yen weakened to a two-week low against the dollar as rising Treasury yields boost the greenback’s allure.

The euro climbed as much as 0.7% versus the greenback before paring the gain after Emmanuel Macron emerged from the first round of France’s presidential election with a narrow advantage over nationalist rival Marine Le Pen.

Investors have been fretting whether a Le Pen presidency would make France less business friendly and more euroskeptic.

Meanwhile, Russia appointed a new commander for its operations in Ukraine. Moscow is refocusing its war effort in the east, having failed to secure territory around the capital, Kyiv.

Russia said it will halt bond auctions for the remainder of 2022 due to prohibitive borrowing costs. The country’s first external default in a century now looks all but inevitable after it was sanctioned and isolated over the conflict.

In cryptocurrencies, Bitcoin was on the back foot, falling to about $42,000.

Events to watch this week:

  • Earnings season kicks off, including reports from Citigroup, JPMorgan Chase, Goldman Sachs, Morgan Stanley, Taiwan Semiconductor Manufacturing, Wells Fargo
  • Chicago Fed President Charles Evans due to speak, Monday
  • EU foreign ministers meet, more Russia measures on the agenda, Monday
  • U.S. CPI, Tuesday
  • OPEC monthly oil market report, Tuesday
  • Fed Governor Lael Brainard, Richmond Fed President Thomas Barkin due to speak, Tuesday
  • Bank of Canada rate decision, Wednesday
  • EIA crude oil inventory report, Wednesday
  • Reserve Bank of New Zealand rate decision, Wednesday
  • China trade, medium-term lending facilities, Wednesday
  • ECB rate decision, Thursday
  • Bank of Korea policy decision, Thursday
  • U.S. retail sales, initial jobless claims, business inventories, University of Michigan consumer sentiment, Thursday
  • Cleveland Fed President Loretta Mester, Philadelphia Fed President Patrick Harker due to speak Thursday
  • U.S. stock and bond markets are among those closed for Good Friday