NEW YORK: Treasury yields retreated on Friday after FedEx Corp’s warning of an accelerating global demand slowdown revived the notion that slower growth will help the Federal Reserve lower inflation and allow interest rates to decline sooner than expected.
Investors have struggled to determine how hard the Fed will crack down on inflation and whether that will spark a sharp slowdown as indicated by a bond market harbinger for recessions, the inverted yield curve between two- and 10-year Treasuries.
“When trading first started it was odd because the news was dominated by FedEx talking about how terrible things are yet we saw bond yields rise, suggesting investors are conflating concerns about global growth with an aggressive Fed,” said Jack Ablin, chief investment office and founding partner of Cresset Capital Management.
“I fully expect that analysts will lower next year’s earnings expectations,” Ablin said. “But if interest rates drop, that’s going to more than offset any diminished earnings. The economy can’t sustain high interest rates for a long time.”
The yield on two-year notes, a bellwether for interest rate expectations, rose initially to top 3.9% and the 2-10 year yield curve inversion widened.
FedEx after the bell on Thursday withdrew the financial forecast it issued just three months ago, saying a global demand slowdown accelerated at the end of August and was on pace to worsen in the November quarter.
The FedEx warning “set the tone for people being forced to take on board what they had been reluctant to take on board all along - that rates will be higher for longer,” said Steven Ricchiuto, US chief economist at Mizuho Securities USA.
The overall US and global macroeconomic story is getting worse while the dollar is getting stronger, which together argue that the Fed is going to win the inflation battle, Ricchiuto said earlier in the day.
“The Fed is going to be successful on inflation because they’re going to keep on tightening and probably hold that tightening for longer,” Ricchiuto said. “Higher for longer, that’s really what’s driving the behavior in the marketplace.”
Stocks on Wall Street fell as FedEx’s profit warning spooked investors, who are concerned the Fed’s aggressive rate hikes will force the US economy into a hard downturn.
Bond yields mostly retreated. The two-year yield fell 2.5 basis points to 3.848% and the 10-year slid 2.1 basis points to 3.438%.
The spread between the yields on the two notes, which has inverted because short-end yields are higher than at the long end, was at -41.2 basis points, compared with just under -14 bps last week.
The majority of market participants expect the Fed to hike rates by 75 basis points next week. In a sign of the turnaround in market thinking, fed fund futures now show just a 16% chance policymakers will raise rates by 100 bps when they meet on Sept. 20-21, according to the CME Fedwatch Tool. Earlier in the week the probability of such an outsized hike had climbed to 37%.
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