Weekly Market Watch

Market Review: A dose of rate hikes

Global equities fell last week as financial markets digested central bank meetings and geopolitical headlines. Federal Reserve (Fed) members unanimously agreed to raise the policy rate by 25 basis points (bps) for the first time since 2023 and signaled the potential for one to two additional hikes through 2027 in the latest Summary of Economic Projections. Fed Chair Warsh’s press conference struck a hawkish tone, emphasizing the price stability component of the Fed’s dual mandate and the importance of returning inflation to its 2% target. Leading up to the meeting, the 10-year U.S. Treasury (UST) yield briefly hit its highest level since 2007 before ending the week just under 5%. The Bank of Japan also hiked rates 25 bps, continuing its rate-hiking cycle, and the U.S. dollar gained while the Japanese yen fell in response to the actions of both central banks.

Market Outlook

Perhaps lost amid last week’s central bank headlines was the strongest U.S. retail sales report in five months, which showed that the consumer continues to be resilient in the face of higher energy prices. Consumer activity and artificial intelligence-driven capital expenditures should continue to support the economy in the near term, but we anticipate volatility as risks from rising yields, elevated government debt, high oil prices and the U.S. midterm elections converge.

Chart of the Week

The U.S. bond market expects additional rate hikes

The 2-year UST yield typically tracks closely with the fed funds rate; however, there has been an increasing divergence between the two this year.
The current 2-year UST yield indicates that bond market participants do not view monetary policy as tight enough.
Last week, following the Fed’s rate hike, the 2-year yield hit its highest level since 2024, and the current yield gap suggests that investors expect additional rate hikes.

Economic Calendar

Previous Week:

Federal Open Market Committee rate decision: 25-bp hike
Bank of Japan target rate decision: 25-bp hike
Consumer Price Index, year-over-year (y/y) (Eurozone, Japan, U.K.): 3.2%, 1.9%, 3.1%
Retail sales (U.S., China, U.K.): 1.2%, 0.4%, 0.5%

This Week:

S&P Global Manufacturing Purchasing Managers’ Index™ (U.S., Eurozone, Japan, U.K.)
Durable goods orders (U.S.)
University of Michigan consumer sentiment survey (U.S.)

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