Federal Reserve officials said interest rates will need to increase further and stay elevated into next year to curb inflation showing few signs of abating despite the central bank’s most aggressive monetary tightening in a generation.
Atlanta Fed President Raphael Bostic write interest rates need to rise between 5% and 5.25% and “then remain there until well into 2024.”
The Fed has been making similar pronouncements for the past five or six months but it appears that the market is now just beginning to listen, perhaps the result of data that has consistently exceeded expectations.
Speaking of which, the top tier ISM Manufacturing data unexpectedly improved last month for the first time in six months and the prices paid component was also greater than forecasted.
After the release of this data point, market expectations for the Fed peak rate climbed to about 5.52% occurring in September.
Because of the Fed statements and the data, both bonds and stocks declined. Technology led shares lower however oil companies rose on the Chinese reopening narrative. The S & P 500 closed below a key uptrend line from October’s low, a bearish indicator. It also briefly breached its 200-day moving average.
Treasuries again sold off with the 10-year Treasury broaching a 4.0% yield.
As noted many times, the longer end of the Treasury market has confidence in the Fed’s inflation fighting prowess, however such is beginning to show some cracks. The current inflation rate of 6.5% normally suggests a 10-year Treasury over an 8.0% yield. If the Treasury market loses confidence in the Fed, the selloff in bonds could be of potential epic proportions.
What will happen today? Productivity data and jobless claims are released.
Last night the foreign markets were down. London was down 0.17%, Paris down 0.6% and Frankfurt down 0.43%. China was down 0.05%, Japan down 0.06% and Hang Seng down 0.92%. Dow and NASDAQ futures are up 0.30% and down 0.50%, respectively on interest rate concerns, a decline in TSLA shares following a disappointing investor’s day and upside surprise on Salesforce outlook. The 10-year is off 4/32 to yield 4.02%.