GLOBAL MARKETS: Bond Yields Rebound, Stocks Edge Up as Last Week's Rally Fades

Global equities rise and Treasury yields rebound as hopes of interest rate cuts fade, but uncertainty remains over growth and inflation.

Global equities saw a rise and Treasury yields rebounded on Monday, following last week's rally in stocks and bonds. However, the optimism surrounding potential interest rate cuts has faded, as markets grapple with an uncertain outlook for growth and inflation. The three main stock indices on Wall Street managed to eke out gains, while major European equity indices closed down. The yield on 10-year Treasuries rose, reversing some of the decline from the previous week.

The US payrolls report on Friday and positive productivity numbers indicated that the American labor market was cooling enough for the Federal Reserve to potentially halt further rate increases. However, the drop in market yields could have unintended consequences, such as increasing corporate loans and stimulating economic growth. Gennadiy Goldberg, head of US rates strategy at TD Securities, explained that the markets are currently in a wait-and-see mode, as traders assess whether the economy will slow further or prove to be more resilient than expected. Goldberg even suggested that the Federal Reserve might be forced to raise rates to ensure inflation remains on a downward trajectory.

Futures are now predicting that the Fed's overnight lending rate will stay above 5% through next June, rather than July, and have priced in almost 85 basis points of rate cuts by the end of 2024. This is more than the 50 basis points of cuts recently envisioned by policymakers. MSCI's gauge of global stocks closed up, marking its sixth consecutive session of gains. However, the pan-European STOXX 600 index experienced a slight loss, with major stock indices in France, Germany, Italy, and Spain all falling.

On Wall Street, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite all saw modest gains. Anthony Saglimbene, chief market strategist at Ameriprise Financial, emphasized the need for equilibrium and stabilization in rates to inspire confidence in the market. Stabilization can provide a boost for equities and the bond market, allowing investors to better assess the cost of capital and the outlook for refinancing debt. However, Saglimbene believes that the market has not yet reached that point.

Market expectations also suggest an 80% probability that the European Central Bank (ECB) will cut rates by April, while the Bank of England (BoE) is expected to ease in August. Central bankers will have the opportunity to address this dovish outlook, with at least nine Fed members, including Chair Jerome Powell, scheduled to speak this week. Speakers from the BoE and ECB are also on the docket. Australia's central bank, on the other hand, is likely to resume raising rates at a policy meeting on Tuesday due to persistently high inflation. The Bank of Japan is slowly tightening its policy as well. The head of the central bank stated that they were closer to achieving their inflation target, but not enough to end ultra-loose policy.

In Asia, shares rallied on hopes of lower borrowing costs. MSCI's broadest index of Asia-Pacific shares outside Japan saw a significant gain, while South Korea stood out with a 5.66% climb as authorities re-imposed a ban on short-selling. Germany's bund yield, the euro zone benchmark, rose after seven consecutive sessions of declines. The recent retreat in Treasury yields impacted the dollar, which saw a slight increase after sliding the previous week. The euro slipped slightly against the dollar, while the dollar lost ground to the yen. The drop in the dollar and yields has provided support for gold, as investors cautiously return to riskier assets. Oil prices also edged higher, following Saudi Arabia and Russia's commitment to additional voluntary oil supply cuts until the end of the year.

In summary, global equities and Treasury yields experienced fluctuations on Monday, as markets assessed the outlook for growth and inflation. While Wall Street saw modest gains, European equity indices closed down. The US labor market cooling and positive productivity numbers have raised the possibility of the Federal Reserve halting further rate increases. However, the drop in market yields could have unintended consequences. Market expectations suggest potential rate cuts by the ECB and BoE, while Australia's central bank is likely to raise rates due to high inflation. Central bankers will have the opportunity to address these outlooks. Shares in Asia rallied, and gold and oil prices saw gains.