US stock and government bond prices swung on Monday after Federal Reserve chair Jay Powell stressed the need to move quickly to raise interest rates to combat high inflation.
Government bond prices, which had already been declining earlier in the day, accelerated their losses after Powell appeared at a conference hosted by the National Association for Business Economics. The yield on the benchmark 10-year Treasury, which rises when prices fall, jumped 0.15 percentage points to 2.3 per cent.
The US government bond market is in the middle of its worst month since Donald Trump was elected president in 2016.
Stocks also dropped in the immediate aftermath of Powell’s comments but recovered most of their losses later in the afternoon. The S&P 500 index dropped as much as 0.9 per cent before closing down less than 0.1 per cent for the day.
The tech-dominated Nasdaq Composite fell 0.4 per cent.
Powell repeatedly stressed on Monday that the central bank needed to move “expeditiously” toward a tighter monetary policy to restore price stability. He added that he was confident the Fed could bring down inflation — which hit a 40-year high of 7.9 per cent in February — without causing a recession.
His comments came after US stocks posted their best week since 2020, despite the Fed starting its long-awaited cycle of rate rises. Europe’s Stoxx 600 index also erased all the losses it had incurred since Russia’s invasion of Ukraine began.
“I was really surprised to see equities turn so positive last week,” said Ewout van Schaick, head of multi-asset at NN Investment Partners.
“The economic impact of the war is increasing,” he said, citing the risks of commodity inflation continuing beyond any resolution of the conflict because of sanctions against Russia and higher input prices denting companies’ profits.
The Stoxx 600 closed flat on Monday. The UK’s FTSE 100 gained 0.5 per cent, but indices in France, Germany and Spain slipped back.
Last week’s gains had been helped by optimism about peace talks between Russia and Ukraine. On Monday the Kremlin played down progress in talks, saying there had been “no more substantial movement” as fierce fighting engulfed the port city of Mariupol. The status of Mariupol has been a sticking point in discussions between the two sides.
In addition to the higher yields on benchmark 10-year Treasuries, yields on shorter-dated two-year notes also jumped 0.16 percentage points, to 2.1 per cent. The Treasury yield curve traditionally slopes upwards as investors demand higher-income yields to compensate for allocating funds for longer periods.
“The current flatness of the yield curve is quite unusual,” said Paul O’Connor, head of UK-based multi-asset at Janus Henderson. “The market is telling us that interest rates are going up quite significantly in the shorter term.”
In commodity markets, Brent crude oil rose 7.1 per cent to $115.62 a barrel on Monday, taking its increase since the day before Russian president Vladimir Putin launched his invasion of Ukraine on February 24 to more than 18 per cent. Russia is the world’s second-largest supplier of crude oil, and while the EU has not yet followed the US in banning Russian imports, it is facing mounting calls to do so.
Germany’s 10-year Bund yield added 0.1 percentage points to 0.46 per cent, about its highest level since late 2018. The equivalent UK gilt yield added 0.15 percentage points to 1.63 per cent.