The 10-year Treasury yield jumped to its highest rate since 2011 as investors brace for the possibility that the Federal Reserve will hike interest rates more than previously expected.
Benchmark 10-year yields hit 3.518% on Monday before bouncing back down to below 3.5%. Two-year yields inched up to 3.961%, their highest level since 2007.
Those two curves were inverted, meaning the shorter-term yields are higher than the longer-term ones. Yield curve inversions can portend recessions, as they show investors have little faith in growth picking up in the coming years.
The inversions between the short- and long-dated yields are the biggest in two decades, according to Bloomberg, a warning sign that the Fed could push the economy into a recession because of its tightening.
ONE UNDERAPPRECIATED ECONOMIC INDICATOR IS DEEPLY NEGATIVE
Top Fed officials are meeting this week to plot the central bank’s next move with its interest rate target. The meeting comes at a critical juncture because the Fed, led by Chairman Jerome Powell, is still trying to walk the fine line of pushing down inflation without tanking the entire economy, a task that is looking less likely.
The August CPI report rattled investors by coming in hotter than expected, increasing the odds that the Fed will be forced to hike rates even more in order to drive down inflationary pressures.
Inflation ticked down to 8.3% for the 12 months ending in August, according to the CPI — well above forecasts.
For Fed watchers, the news essentially locked at least another massive 75-basis-point interest rate hike by the Fed. The central bank raises rates in order to slow demand and thus drive down inflation, and this year, it has embarked upon a historic tightening cycle. Still, given how hot inflation has been, some investors are betting the Fed jacks up rates to an even more historic degree.
Investors now see an 82% chance of a 75-basis-point hike and an 18% chance that the Fed will raise rates by a whole percentage point at once, according to CME Group’s FedWatch tool, which calculates the probability using Fed fund futures contract prices.
“It was another bad week for the financial markets as yields leaped and stock prices plunged,” said Bob Schwartz, senior economist at Oxford Economics. “An unsettling consumer price report was the catalyst for the heightened market jitters. Inflation is running hotter than expected, spurring expectations of a more aggressive Fed policy response and upping the odds of a recession.”
The worse-than-expected inflation report also sent the markets tumbling last week. The Dow Jones Industrial Average shed more than 1,200 points on Tuesday, the seventh-biggest decline in points in U.S. history. The tech-heavy Nasdaq composite plunged by more than 5%, and the S&P 500 had about 4.3% of its value erased following the report.
Further muddying the waters for the central bank’s rate hikes and the prospect of a recession was a gloomy report from shipping giant FedEx that Deutsche Bank characterized to clients as the “weakest set of results we’ve seen relative to expectations” in two decades.
FedEx CEO Raj Subramaniam also drew headlines when he was asked by CNBC whether the economy is entering “into a worldwide recession.”
“I think so. But you know, these numbers, they don’t portend very well,” Subramaniam responded. “I’m very disappointed in the results that we just announced here, and you know, the headline really is the macro situation that we’re facing.”
Transportation and shipping stocks are viewed by some as a leading indicator of economic vitality and how the wider stock market will perform, so FedEx’s outlook is causing investors to panic that a recession could be at the country’s doorstep.
All eyes will be on Wednesday’s meeting, not only because of the announcement on how much the interest rate target will increase but also because the Fed is set to release its new economic projections.
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The last time the Fed released projections was in June, when the central bank predicted inflation would tamp down to 5.2% by the end of this year. Investors are interested in how the Fed’s projections have changed.
The projections will also include estimates of the unemployment rate in the coming months and years and of gross domestic product growth — two factors that will better reveal the degree to which Fed officials expect economic conditions to deteriorate.
