- The US economy’s strength stoked concerns about the prospect of higher rates.
- US services industry activity unexpectedly increased in November.
- The market anticipates the terminal rate to increase to 5.001% in May, up roughly nine basis points from last week.
Global equities rose slightly on Tuesday after Monday’s decline as fresh indications of the US economy’s strength stoked concerns about the prospect of higher interest rates lasting longer. This overshadowed China’s relaxation of economic restrictions.
In the latest indication of underlying economic strength that could keep the Federal Reserve on guard to tighten policy further, US services industry activity unexpectedly increased in November, with employment rebounding.
The Institute for Supply Management (ISM) said that its non-manufacturing PMI went up to 56.5 last month from 54.4 in October, which was the lowest figure since May 2020. Yields, which move inversely to a bond’s price, surged higher after that announcement.
Both orders for durable goods and US industrial activity increased by 1% in October.
“The Fed is the central theme. The Fed wants the economy to slow down to assist combat inflation, not for it to collapse, “said Tim Ghriskey, the firm’s chief financial strategist in New York.
“Whether it’s China opening up or decreased gas costs, good news on the economy is bad news for inflation.”
Asian stocks increased in anticipation that China’s efforts to relax its zero-COVID-19 policy would spur global economic development and increase commodity demand. However, investors were alarmed by the ISM report on top of last week’s positive US jobs data as they tried to predict when the Fed would eventually stop raising rates.
According to futures, the market anticipates the terminal rate to increase to 5.001% in May, up roughly nine basis points from last week but to decrease to 4.574% by December 2023.
According to final PMI figures, the euro zone’s business activity shrank for a fifth consecutive month in November, raising the possibility of a mild recession.
The difference between the two-year and ten-year note yields on the US Treasury market’s increased to -81.4 basis points. An inverted curve signals a looming recession.
Treasury yields increased on speculation that the Fed will keep hiking rates through the end of the year, albeit more slowly. Investor attention is still centered on how quickly central banks will end their cycle of rate increases.