U.S. equities have ridden through various crosscurrents over the last week, from the blazing jump in Treasury rates to the Middle East shock at the weekend, but they remain on board despite what the IMF calls “remarkable” U.S. economic performance.
With third-quarter profits expected later this week, Wall Street market indices rose to their highest level in over three weeks on Monday, recovering from early losses in the previous two sessions. Stock futures are up again ahead of the bell today.
The initial market jolt from the weekend assaults on Israel appeared to fade swiftly, with a minor increase in oil prices levelling off considerably below previous highs. On Tuesday, US oil held slightly around $86 per barrel, still down about 10% from its peak in late September and 5% year on year.
As cash Treasury markets returned from Monday’s Columbus Day vacation to a week of heavy long-term debt auctions, they were met with renewed confidence in the Federal Reserve’s policy rate trajectory.
Specifically, Lorie Logan, the generally hawkish Dallas Fed president, argued that the recent tightening in bond markets may have done the Fed’s work for it and reduced the need for another policy rate rise. Fed futures appear to concur, with just roughly a one-in-four possibility of another rate hike.
“If long-term interest rates remain elevated because of higher term premiums, there may be less need to raise the fed funds rate,” Logan said, referring to rising risk premia on long-term Treasury bonds.
Fed Vice Chair Philip Jefferson stated, “I will remain cognizant of the tightening in financial conditions through higher bond yields and will keep that in mind as I assess the future path of policy.”
Ten-year US Treasury rates are expected to start Tuesday’s trading day at around 4.65%, nearly a quarter of a percentage point lower than the peak hit soon after Friday’s huge September employment data.
The International Monetary Fund highlighted the United States’ remarkable economic strength in its 2018 World Economic Outlook, which was issued on Tuesday at the IMF and World Bank’s annual meetings in Marrakech.
While the IMF reduced its growth forecasts for China and the eurozone, it kept its total global prediction constant, citing the “remarkable strength” of the US economy.
The Fund raised its 2023 and 2024 US growth predictions by 0.3 and 0.5 percentage points, respectively, to 2.1% and 1.5% annual rates.
China’s continued troubles were exemplified by the most troubling twist in its protracted property implosion on Tuesday, when its key benchmark stock indexes fell again.
Country Garden increased losses and closed down more than 10% after the beleaguered developer stated that it may be unable to complete all of its offshore payment commitments on time or within the necessary grace periods.
Once again, sources imply that China’s fiscal policy reaction will be minimal, at most.
Bloomberg News reported on Tuesday that Beijing is considering increasing its budget deficit by issuing at least 1 trillion yuan ($137.1 billion) in new sovereign debt for infrastructure investment.
The after-hours data, however, was enough to boost European infrastructure equities, as well as the euro. The dollar was weaker overall as a result of the Fed’s dovish stance.
Shares of Chinese companies listed in the United States, such as Alibaba Group Holding, JD.com, and Baidu, climbed 1.1% to 2.4% ahead of the opening bell.
PepsiCo crept 0.8% higher ahead of the beverage giant’s third-quarter earnings, while Unity gained 6.4% after the video-game software maker announced CEO John Riccitiello’s retirement.