Markets finally cracked on Friday and are now in full tantrum mode as they start to believe the chances are rising that US interest rates will rise this year – and could do so as early as next week.
As a result sharemarkets across the world fell the most since June on Friday, hit by rising expectations that the Federal Reserve could be closer than thought to an interest rate hike. That boosted the US dollar and saw commodities slide – led by oil and gold.
The US dollar rose and the Aussie dollar gyrated, jumping a cent to a day’s high of 76.87, before sliding on the back of the comments from the Fed officials and the sell off on Wall Street and in US and European bond markets.
The Aussie ended the day around 75.82 and will push lower as US investors tie themselves in knots (as they did last November and December before the first rate rise in 8 years). That will push the Aussie down under 75 US cents and take pressure off the Reserve Bank.
In fact after last week’s strong GDP figures, a US rate rise will end rate cuts in Australia. The ASX will be down near 80 points this morning, which will add pressure on the currency and investor sentiment.
The yield on Australian 10 year bonds jumped 10 points on Friday and they closed the week around 1.96%.
Bond yield rose as prices fell as well. US Treasury prices fell sharply pushing yields to their highest level since Britain’s Brexit vote on June 23 thanks to a series of comments by Fed officials which seemed to raise the chances of a rate rise.
And with a speech tonight, our time, from another Fed official on the day before the central bank goes into its pre-meeting cone of silence (the meeting is on September 21 and 22) expectations are for more hawkish comments on the chances of a rate rise.
Fed governor Lael Brainard, (a possible US Treasury secretary if Hilary Clinton becomes President), speaks in the US and will be watched closely to see if she joins the chorus of rate rise urgers.
She is a voting member of the Fed’s main monetary policy committee, so her views will be vital for markets ahead of the Fed meeting next week.
Two other senior Fed officials are due to speak tonight, our time as well.
Also watch the Bank of England this week where the chances of a possible second rate cut may be hit with the change of sentiment about US rates.
What is worrying investors though is that the comments from Fed members are not backed by the latest data from the economy – weaker jobs figures for August, a slide in car sales, a big slump in the pace of activity in manufacturing and services, and a feeling that contrary to expectations a month ago, that the US economy has started slowing.
Boston Fed President Eric Rosengren, who is a voter this year on the Fed’s interest-rate setting board, worried investors on Friday when he said in a speech that the Fed could add another rate increase to last December’s because the risks facing the economy are more in balance.
And Fed Gov. Daniel Tarullo said he is open to a possible rate rise this year, but added that there is no need to raise interest rates “right now,” because of concerns about high asset prices (such as US shares).
These comments added to to the selling pressures in US Treasuries on Friday after it had been kicked along by European Central Bank declining to add to its already extensive monetary stimulus.
That inaction saw yields on US Treasuries jump by the most in a month as investors saw it as a defacto (small) tightening in monetary policy, which of course it wasn’t
As a result, over the week US Treasury yields rose by the most in a month and the key 10 year yield rose 7.4 basis points to 1.671% (including a 5.7 point leap on Friday), the highest they have been since June 23.
The yield on the 2-year Treasury bond which is most sensitive to Fed rate changes, fell 0.2 basis points over the week but gained 1.2 on the day to 0.790%.
And in Europe, the yield on Germany’s 10-year bond known as the bund, turned positive for the first time since the Brexit vote, rising 7.7 basis points to 0.012%.
Investors will now look at the Japanese bond market later today to see if there is any impact there from this change in attitude by US and European markets.
