A rebound in U.S. stocks and Treasuries lost steam after the head of the Federal Reserve Bank of New York said that the US central bank should leave interest rates high for “some time.”
The S&P 500 fell 0.3% while the tech-heavy Nasdaq 100 erased the day’s gains.
Treasury two-year yields, which are more sensitive to imminent policy moves, steadied around 5%, the benchmark 10-year – where yields hit the highest since 2007 on Thursday – moved to 4.57%.
The dollar erased losses after New York Fed President John Williams said that the Fed may be done raising interest rates, but the central bank should keep them elevated to bring inflation back to the central bank’s 2% goal.
His commentary “offers no relief on yields,” Krishna Guha, Evercore ISI’s head of central bank strategy, wrote in a note.
“Williams’ comments overall confirm our view that the Fed is being pragmatic on the here-and-now decision as to whether a further hike is needed – and will end up dropping it – even as it adopts a tough posture on the outlook for rates in ’24.”
Further cutting into optimism for the world’s largest economy is the prospect of a prolonged government shutdown while the United Auto Workers extended plans for walkouts to more Ford Motor Co. and General Motors Co. plants.
U.S. stock benchmarks have struggled to recover lost ground this week with both gauges on track for their first negative quarter in a year as the highest interest rates in 22 years dented enthusiasm for risk assets.
Global bonds are poised for their worst monthly selloff since February.
More cautious comments from other Federal Reserve officials and data suggesting inflation is moderating soothed fears of a more immediate rate hike on Wall Street but the central bank is still left to walk a fine line to avoid a recession.
Pershing Square Capital’s Bill Ackman sounded a note of caution on longer-dated Treasuries.
The yield on the 30-year has risen around 82 basis points since the end of June and touched about 4.81% Thursday, the highest since 2010. He told CNBC that rate could reach beyond 5%.
“Looking ahead, regardless of whether the landing is ultimately hard or soft, we think U.S. and global economic activity is set to slow over the next year,” said Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management. She remains bullish on bonds maturing in five to ten years.
“Falling inflation should bolster the real return on fixed income, despite the recent rebound in energy prices,” she added.
High interest rates around the globe have kept a lid on stocks of late.
The July-September quarter has been the worst for MSCI’s all-country index since September, 2022 as surging oil prices fanned fears over inflation and economic growth.
Oil declined for the second day after WTI rallied above $94 a barrel earlier this week, crude is logged its biggest quarterly gain since March 2022.