Markets Adjust to Higher Rate Backdrop

Global Economic and Capital Markets

A review of the week’s top global economic and capital markets news.

As of noon on Friday, global equities were lower on the week amid a sharp backup in global bond yields. The yield on the US 10-year note rose to 4.04% from 3.81% a week ago. The price of a barrel of West Texas Intermediate crude oil increased $2.65 to $72.10. Volatility, as measured by the Cboe Volatility Index (VIX), rose to 15.4 from 13.3.


Global yields climb


Hawkish FOMC minutes, tight labor markets and fears that inflation is falling too slowly (and risks becoming entrenched) sent bond yields soaring this week. The yield on the US 10-year note broke back above the 4% level and made a new 2023 high this week, overtaking the highs posted just before the banking crisis erupted in March. Similarly, German bund yields have risen to their highest level of the year and are only about 10 basis points below the highest levels of the cycle, 2.75%. UK 10-year gilt yields reached 4.70%, their highest level since 2008, amid growing expectations that the Bank of England may need to hike rates as high as 6.5% in the coming months from 5% today.


US payrolls fall short 


For the first time in over a year, US June nonfarm payrolls fell short of economists’ expectations, rising 209,000, below the 230,000 consensus forecast. The prior two months’ gains were revised down by 110,000 jobs while the unemployment rate ticked down to 3.6% from 3.7% in May. Average hourly earnings held steady at an upwardly revised 4.4% year over year. While the data are an improvement from the US Federal Reserve’s perspective, they are not expected to derail an expected 0.25% rate hike at the Fed’s 26 July meeting.


US services sector bounced back in June


The Institute for Supply Management’s nonmanufacturing purchasing managers’ index rebounded to 53.9 in June after dipping to 50.3 in May. With services making up the vast bulk of US economic activity, the data only added fuel to the bond market fire. The much smaller manufacturing sector continued to struggle, with the PMI slipping to 46 from 46.9.


Xi warned Putin on nuclear weapons


The Financial Times reported this week that when China’s President Xi Jinping paid a state visit to Moscow in March he warned Russian President Vladimir Putin against using nuclear weapons in Ukraine, indicating that Beijing harbors concerns about Russia’s war even as it offers tacit backing, according to western and Chinese officials. Deterring Putin from using such weapons has been central to China’s campaign to repair damaged ties with Europe, according to the report.


Despite pause, Fed minutes hawkish


Despite the Fed’s decision to hold rates steady at the June meeting of the FOMC, almost all the participants saw the need for additional increases and some would have preferred to have hiked 0.25% in June. At the post-meeting press conference, Fed Chair Jerome Powell expressed hope that there would be an economic soft landing, but the minutes show that the Fed staff still forecasts a recession late this year, though they believe that scenario is now less likely. Officials noted that declines in inflation were slower than they had expected and that labor markets remain very tight.


In an interview published Friday, European Central Bank President Christine Lagarde said that inflation in the eurozone may stay above-target in 2024 and 2025.


Beginning in August, China will impose export controls on two metals used in chipmaking. The European Union urged China to narrow the scope of the gallium and germanium export controls.


The US announced this week that it will curtail Chinese access to US-based cloud computing services.


Iran’s navy attempted to seize two oil tankers in the Straits of Hormuz this week and fired on one before the attacks were disrupted by the US Navy.


The People’s Bank of China is expected to hold off on making dramatic cuts in domestic interest rates, concerned that such an action would widen interest rate differentials and further weaken the yuan. However, China’s premier, Li Qiang, pledged speedy policy support measures in other areas.


Bloomberg News reported on Thursday that the British government plans to reverse the MiFID II ban on free Wall Street research.


Japanese workers’ pay packages increased 2.5% year over year in May, doubling economists’ expectations. The rise helps solidify the case that the Bank of Japan can sustainably hit its 2% inflation target leading to an adjustment in its yield curve control policy later this year.


Job openings in the US eased in May to 9.8 million from 10.3 million in April, though openings remain elevated relative to history. The quit rate ticked above 4 million for the first time since December, indicating workers still have considerable leverage in wage negotiations.


The Reserve Bank of Australia held rates steady at 4.10 % on Tuesday but reiterated that more tightening may be needed to bring down inflation.


Late this week US Secretary of the Treasury Janet Yellen began a trip to China, where she said the US-China rivalry is not a winner-take-all situation and called for a fair set of rules for both sides.


In contrast to weaker US numbers, Canadian employment data showed unexpected strength in June. Nearly 60,000 jobs were created, more than reversing the 17,000-job decline in May. A rise in the participation rate saw the unemployment rate increase to 5.4% from 5.2%.

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Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research,


This content is directed at investment professionals only.  

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