(Oil added, gold settlement prices)
US yield curve most inverted since 1981
MSCI world stocks up 0.2%, weekly eye loss
By Herbert Lash and Carolyn Cohn
NEW YORK/LONDON, Nov 18 (Reuters) – Global equities were scuttled and a key part of the Treasury yield curve inverted further on Friday, a sign that the U.S. economy will stall next year and that investors hope the Federal Reserve back off. an aggressive hiking of interest rates.
Surprisingly strong retail sales data this week dispelled the idea that the Fed will further tighten monetary policy even though inflation suggested soft consumer and producer price pressures and would allow for lower rates .
Treasury yields rose for a second day after hawkish comments on Thursday from St. Louis Fed President James Bullard, who said a rate hike to a range of 5% to 5.25% would need to be “restrictive enough” to curb inflation.
The statements were a blow to investors whose rates had peaked at 5% or less. Futures now show the fed funds rate at 5.04% by May, up from 3.83% now. But the future also shows that rates will slide to 4.57% in December 2023 on expectations that the Fed will move to ease policy as the economy weakens.
Boston Fed President Susan Collins reinforced the Fed’s hardline stance, telling CNBC that with little evidence that price pressures are easing, policymakers may need to deliver another 75 basis point hike to bring inflation under control.
Three of Europe’s top policymakers also said the European Central Bank must raise rates high enough to moderate growth while also battling high inflation.
“When we think the market is getting wrong, we are pricing in rate cuts next year,” said Dec Mullarkey, managing director of investment strategy and asset allocation at SLC Management.
Fed Chairman Jerome “Powell has often made the point, ‘we’re worried that if you let up too quickly, you’re going to have a second inflationary surge,’ and that’s not something they want to do again,” Mullarkey said. .
The market sees a downturn next year as the yield between two-year and 10-year Treasuries has widened nearly -70 basis points, an inversion of the yield curve that reached such deep levels last year in 2000.
When the yield on the 10-year note is lower than the two-year, a security that reflects interest rate expectations, it suggests a slowdown or worse and that the Fed will cut rates to stimulate the economy.
The yield on the two-year note rose 5.1 basis points to 4.505%, much higher than the 10-year note, which was up 3.9 basis points to 3.812%.
MSCI’s global equity index rose 0.18% but was headed for a loss of about 0.8% on the week, coming off recent two-month highs. The pan-European STOXX 600 index 1.16%, its best one-day performance in a week.
Inflows into global equity funds hit their highest level in 35 weeks in the week to Wednesday, according to a report from Bank of America (BofA), as investor optimism rose.
Stocks traded on Wall Street were little changed or lower. he Dow Jones Industrial Average rose 0.17%, the S&P 500 gained 0.02% and the Nasdaq Composite fell 0.51%.
Eurozone banks are set to repay 296 billion euros in multi-year loans from the European Central Bank, the ECB said on Friday.
The amount is less than the half a trillion euros that analysts had expected, but still the biggest drop in excess liquidity since records began in 2000.
The yield on Germany’s 10-year government bond, the benchmark for the eurozone, was at 2.012%.
The euro was down 0.36% to $1.0323, having eased from a four-month peak of $1.0481 hit on Tuesday as some policymakers argued for caution on tightening.
The yen eased 0.14% against the dollar at 140.38.
Chinese blue chips fell 0.45% amid reports Beijing asked banks to check bond market liquidity after rising yields caused losses for some investors.
There were also concerns that a rise in COVID-19 cases in China would challenge plans to ease the severe curbs on movement that have crippled the economy.
Japan’s Nikkei slipped 0.1% as data showed inflation running at a 40-year high as a weak yen weighed on import costs.
Oil fell by more than $3 a barrel and was on track for a second weekly decline, weighed down by concerns about weakening demand in China and further increases in US interest rates.
US crude futures fell $1.56 to settle at $80.08 a barrel.
US gold futures settled up 0.5% at $1,754.4 an ounce.
Bitcoin fell 0.65% to $16,577.00.
(Reporting by Herbert Lash, additional reporting by Carolyn Cohn in London, Wayne Cole in Sydney and Lisa Mattackal in Bengaluru; Editing by Sam Holmes, Simon Cameron-Moore, Louise Heavens, Philippa Fletcher)