- Stocks collapsed on Wednesday last week after a hawkish Fed policy meeting.
- Traders are pricing a 100% chance of a Fed rate hike in October.
- The US pledged to remove sanctions on Iranian oil.
Equities eased slightly on Monday, dragged down by the tech sector, as yields remained elevated after last week’s FOMC meeting. The tech decline overshadowed optimism as the US and Iran made great progress in their talks in Switzerland. Market participants are also looking forward to the US PCE price index report, which will give more clues on future policy moves.
US Yields (Source: Bloomberg)
Yields soared while stocks collapsed on Wednesday last week after a hawkish Fed policy meeting. Before the meeting, traders were cheering the announcement of a deal between the US and Iran to end their war. Oil prices were sliding, and inflation concerns dropped. With this, some were expecting central banks to relax a bit after signaling a willingness to tighten monetary policy.
The rally in oil prices due to the war had caused a spike in US inflation. The labor market was overheating, putting the Fed on high alert. Market participants increased bets for a rate hike in December, pushing the likelihood up to 70%. The US-Iran deal led to a drop in this figure to 58%.
Consequently, investors were expecting a less hawkish tone at the meeting. However, policymakers showed a greater willingness to increase borrowing costs. This came as a surprise to many and led to a sharp repricing of rate hike expectations.
After the meeting, traders were pricing a 100% chance of a hike in October. As a result, Treasury yields and the dollar jumped. Meanwhile, equities plunged.
The US-Iran deal has changed the outlook for the future, with experts forecasting a surge in supply. However, as usual, there was some uncertainty over the weekend after reports that Iran had again closed the Strait of Hormuz. Tehran cited continued attacks in Lebanon. Fortunately, calm returned on Monday as talks continued. The US pledged to remove sanctions on Iranian oil. Meanwhile, Iran agreed to have its nuclear activities monitored.
The progress towards a lasting peace deal allowed oil prices to slide further. Although the Fed has shown a more hawkish tone, this could change as the dust settles on a war that broke out in late February. This week, traders will watch the core PCE number to better gauge inflation in the US.
