Bonds Sink Post-Powell; U.S. Equity Futures Slip: Markets Wrap

Fed’s Powell open to half-point May hike to curtail inflation
Australia, New Zealand join Treasury slide; oil extends rally

A selloff in bonds deepened Tuesday and U.S. equity futures wavered after Federal Reserve Chair Jerome Powell struck a more hawkish tone on the central bank’s campaign against high inflation.

Treasuries extended losses and Australian and New Zealand debt slid after short-dated U.S. yields Monday posted one of the biggest daily climbs of the past decade. The gap between five-year and 30-year U.S. yields is around the smallest since 2007, a sign of worry that Fed tightening will sap the economy.

U.S. and European futures dipped, while Asian stocks rose partly on a climb in export-reliant Japan amid a weaker yen. Hong Kong pushed higher, bolstered by Alibaba Group Holding Ltd.’s ramped up, $25 billion share buyback program.

Powell said the Fed is prepared to raise interest rates by 50 basis points at the next policy meeting if needed. The central bank hiked by a quarter-point last week and signaled six more such moves this year. The dollar advanced.

Oil added to a rally, with Russia’s war in Ukraine nearing the one-month mark and no conclusion in sight. There are signs the European Union may be edging closer to a ban on Russian crude imports to punish Moscow for its invasion.

The trajectory of bonds is a focal point for investors fretting about a growth slowdown or even a recession. High inflation, stoked by commodity-market disruptions due to the war, has increased pressure on the Fed and some other key central banks to tighten monetary policy.

“For the long term, 2.3% on the 10-year is not such a high figure at all,” Linda Duessel, senior equity strategist at Federated Hermes Inc., said on Bloomberg Television, referring to U.S. Treasuries. “What spooks the market is when you have very quick moves, such as what we’re having now.”

Derivative traders Monday priced in about 7.5 quarter-point rate hikes at the remaining six Fed meetings this year, effectively making provision for more than one half-point rise.

“If Powell is reinforcing that they are going to address inflation -- that they’ve made mistakes, that their expectations of inflation were incorrect -- just admitting that, and saying that we’re ready to do everything it takes, is definitely reassuring for equity investors,” Erin Gibbs, chief investment officer at Main Street Asset Management, said on Bloomberg Television.

Duessel from Federated Hermes said the gap between the three-month and 10-year tenors in the Treasury market is still steeply upward sloping, supporting the view that the U.S. economy remains strong.

While the Fed is tightening, expectations are growing that China will loosen monetary policy to support economic expansion.

China’s cabinet pledged stronger monetary-policy support while cautioning against flooding the market with liquidity, state broadcaster CCTV reported Monday. Authorities vowed to avoid measures that can hurt market sentiment.

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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