US Yields Accelerate Extremely Higher, Dollar Rises Sharply to Six-Week HighsLast week, the Federal Reserve again raised rates and upgraded the economic outlook for upcoming quarters, while inflation remained the same, but still above the 2% target
The 10-year benchmark yield was trading at the current cycle highs near 3.1% on Wednesday, while the 30-year yield rose to fresh highs at 3.26%. The short-end of the yield curve has risen as well, although at a slower pace and, therefore, the yield curve has steepened over the last couple of days.
Last week, the Federal Reserve again raised rates and upgraded the economic outlook for upcoming quarters, while inflation remained the same, but still above the 2% target. This could mean that the Federal Open Market Committee expects the US economy to continue with a strong momentum but without any significant inflation pressures. Therefore, the tightening of the monetary policy may maintain its pace and 2019 could bring with it another four-rate hike, unless the economic momentum drastically deteriorates.
More positive information came to light on Wednesday. This included the publication of the latest ADP employment report, which showed that employment increased by 230,000 in September, well above 185,000 that analysts predicted. Another piece of good news came in the form of the non-manufacturing ISM survey which soared to 61.6 for the month of September, against forecasts of a drop to 58.0 from 58.5 scored in August. The greenback rose afterward, but more importantly, US yields surged sharply.
Investors expect another strong labor market report on Friday, as the unemployment rate expecting to drop further to 3.8%, while the Nonfarm payroll could create around 200,000 jobs. Wage growth could tick higher to 3.0% annually, which might be another signal for yields to rise.
There is only one problem with rising yields – stock markets might get spooked by them. Rising yields and quantitative tightening may effectively reduce the amount of money circulating in the economy and therefore stock buybacks, which are supporting the stock markets on every dip, might eventually get more expensive. Should the current pace of monetary tightening and rising yields continue, we could see a bigger correction of the stock markets sometime in 2019, as one of the biggest stock buyers – companies performing buybacks – could be absent the next time the market drops.
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