While bond traders had anticipated a hawkish message from Powell, the clearly stern tone caught many off guard. Yields on two-year Treasuries spiked to the highest level since 2007 and expectations for additional rate hikes by December grew from what was priced in before the speech.
Synchronized stock and bond selloffs have become a signature feature of 2022. What stands out in the latest bout of selling is the addition of commodities, the darling of the inflation trade earlier this year.
With the Fed laser-focused in taming price growth, oil posted its biggest monthly drop since November, while gold fell for a fifth straight month, the longest losing streak in four years.
All the beating has translated into a tightening of financial conditions, something that Fed policy makers are likely to find comfort with as they seek to raise interest rates and lower asset prices to temper overheated demand.
US financial conditions are tightening at a swift pace
After easing since mid-June, a Goldman Sachs Group Inc. gauge of US financial conditions has become tighter again. In fact, the index’s increase over the past 150 days, a sign that stress is mounting, ranked among the fastest in decades.
Angst among equity investors is running high ahead of a slew of market events, including Friday’s employment report and the last reading on inflation before the Fed’s next policy meeting. Traders are roughly split on whether the central bank will raise rates by a half a percentage point or three-quarters of one. Mutual funds have raised their cash holdings at the fastest rate since the global financial crisis, while equity exposure among hedge funds hovers near a two-year low, data compiled by Goldman show.
“The only certainty investors have for the next six to 12 months is that global central banks will be simultaneously tightening monetary policy through interest rate hike and quantitative tightening,” said Michael O’Rourke, chief market strategist at Jonestrading. “Investors won’t have meaningful catalysts to buy financial assets until valuations reset or clarity emerges.”
This article was provided by Bloomberg News.