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Treasuries Sink as Fed Pivot Seems Less Likely: Markets Wrap

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(Bloomberg) -- US Treasuries sank and stocks dropped after Federal Reserve officials signaled the central bank is still intent on raising rates until inflation is under control.

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Treasury yields rose across the curve, with 10-year rates climbing as much as 20 basis points to 2.77%. The yen, which was on track for its fifth daily gain, fell as the dollar snapped four days of losses amid a sudden turnaround in risk sentiment.

The S&P 500 dropped for the second straight day as Nancy Pelosi’s arrival in Taiwan prompted China to announce missile tests, even as she said her visit did not alter longstanding US policy in the region. The Nasdaq 100 also ended the day down.

Both indexes swung between gains and losses on Tuesday as markets remained on edge with geopolitical tensions simmering and fresh commentary from Fed officials making it apparent that a policy pivot was less likely.

Read More: Volatility Hits Markets With Geopolitics Adding to Set of Risks

Stocks started August on the back foot after posting their best month since 2020 in July. Investors have been keeping an eye out for hawkish comments from Fed officials about the need for higher rates to restrain elevated inflation. While San Francisco Fed President Mary Daly said on Tuesday that the Fed is “nowhere near” done with its efforts to tamp down on inflation, Chicago Fed President Charles Evans said he expects the pace of rate hikes will start to slow later in the year.

“The Fed is not likely to announce they’re letting up on the brakes at this point,” said Ellen Gaske, economist at PGIM Fixed Income. “They are still seeing inflation numbers that have not started to recede.”

Cleveland Fed President Loretta Mester echoed this, saying that she wants to see “very compelling evidence” that month-to-month price increases are moderating before declaring that central bank has been successful in curbing inflation.

Fresh economic data has also kept investors on their toes. Recent data showed that US job openings in June fell to a nine-month low, a sign of moderating demand for labor as economic pressures mount. The job market has been a bright spot in an economy otherwise losing momentum and possibly heading toward a recession.

Pelosi’s trip has created a fresh pressure point for investors already dealing with the prospects of a US recession, worldwide rate hikes and inflation that risks becoming entrenched as Russia’s war in Ukraine exacerbates food shortages.

“The Taiwan story fits into the broader risk-off theme,” said Mark McCormick, global head of FX strategy at TD Securities. “It raises concerns about global growth issues, especially if geopolitical tensions and knock-effects exacerbate inflationary concerns. In turn, that forces central banks to keep fighting inflation in spite of the clear deceleration of global growth.”

Read More: Pelosi to Meet Taiwan Chief as China Opens Military Drills

Earnings

Corporate earnings continued to roll in on Tuesday, with higher prices threatening to erode margins. Caterpillar Inc. slumped after a slowdown in China weakened its business. That weighed on the Dow Jones Industrial Average, which was lower for the day. Shares of Uber Technologies Inc. surged the most since 2020 during the trading session after the firm reported second-quarter revenue that beat the average analyst estimate.

With earnings trickling in after the markets closed, Starbucks Corp. rose in extended trading after its net revenue came in slightly above expectations. Meanwhile, Advanced Micro Devices Inc., the second-biggest maker of computer processors, fell after giving a lukewarm forecast for the third quarter.

This week’s MLIV Pulse survey is asking about your outlook for corporate bonds, mergers and acquisitions and health of US corporate balance sheets through the end of the year. It takes one minute to participate in the MLIV Pulse survey, so please click here to get involved anonymously.

What to watch this week:

  • St. Louis Fed President James Bullard is due to speak, Tuesday

  • OPEC+ meeting on output, Wednesday

  • US factory orders, durable goods, ISM services, Wednesday

  • BOE rate decision, Thursday

  • US initial jobless claims, trade, Thursday

  • Cleveland Fed President Loretta Mester due to speak, Thursday

  • US employment report for July, Friday

Some of the main moves in markets:

Stocks

  • Futures on the S&P 500 fell 0.6% as of 4:58 p.m. New York time

  • Futures on the Dow Jones Industrial Average fell 1.1%

  • The MSCI World index rose 0.1%

Currencies

  • The Bloomberg Dollar Spot Index rose 0.8%

  • The euro fell 0.9% to $1.0166

  • The British pound fell 0.7% to $1.2162

  • The Japanese yen fell 1.2% to 133.15 per dollar

Bonds

  • The yield on 10-year Treasuries advanced 17 basis points to 2.75%

  • Germany’s 10-year yield advanced four basis points to 0.82%

  • Britain’s 10-year yield advanced six basis points to 1.87%

Commodities

  • West Texas Intermediate crude fell 0.2% to $93.74 a barrel

  • Gold futures fell 0.5% to $1,779.50 an ounce

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