OPINION
Market Rating Before FOMC MeetingJan 31
US 10-Years are Back at 4%: Pressure on International Assets Intensifies
October started quite well in terms of markets. The support brought by the relative improvement in the investor risk atmosphere, especially to the stock market and the currencies of major countries in the first quotations of the month was not permanent. The pressure of the dollar on international assets has started to increase again.
The PMI data announced for the world's largest economy last week was an important determinant. As reported by IHS Markit and S&P Global, the composite purchasing managers index (PMI), which is the leading indicator of economic performance in the country, remained below the threshold of 50 with a 49.5 points level in September. The data, which was 44.6 points in the previous month, thus signaled that economic activity lost momentum and contracted. In this period, as the leading sector of the economy, the manufacturing PMI maintained its strong course with 52 points, while the services PMI came in at 49.3 points.
The data, which revealed that the risks of recession in the world's largest economy have increased, supported international assets by creating a minor expectation that the US Federal Reserve (FED) will now downshift in interest rate hikes to stay on the soft landing path at its November meeting.
However, as of Friday, the market sentiment has almost completely reversed. Nonfarm payrolls (NFP) increased by 263,000 in September, against market expectations of 250,000, the US Department of Labor reported. In this period, it was understood that the labor market was extremely tight, with the unemployment rate falling to 3.5% despite the 3.7% estimates.
In other words, the strong course of labor conditions in the world's largest economy eased the FED's monetary tightening bill and fixed the interest rate hike expectations for the Federal Open Market Committee (FOMC) meeting on November 1 - 2 to 75 basis points, which will be the fourth. The 75 basis point tightening estimates for the November FOMC meeting in the CME has reached 75.5%.
On the other hand, the impact of the FOMC's influential figures' statements is seen. Chicago FED President Charles Evans underlined that the target interest rate may be needed to rise slightly above 4.5% early next year and stay there for a while. Minneapolis FED President Neel Kashkari pointed out that more interest rate hikes are likely to come, while New York FED President John Williams warned that the Bank is far from where it should be.
Under this outlook, interest rate expectations created a selling wave in the global bond market. The US 10-year bond yields, which retreated to 3.56% on October 4, have again reached the psychological 4% as of today. The 2-10-year yield curve is at the level of minus 0.349%.
It is possible to say that the intense sales in the bond market created a demand for the dollar. In today's initial pricing, the dollar index (USIndex) tested the highest level of nearly two weeks with 113.35. At this point, it can be stated that the developments in the Russo-Ukrainian war also support the dollar as a haven. The tension, triggered by the explosion on the Crimean Bridge, escalated yesterday morning when Russia launched missile attacks on important cities, including the capital of Ukraine, Kyiv.
Thus, VIX, the indicator of investor stress in the markets, exceeded 33 points. This dealt a big blow to SP500, the leader of the stock market. The SP500 index erased its two-week gains with 3 572 points in today's quotations. On the other hand, the strong dollar also puts precious metals under pressure. Ounce gold has fallen to the level of $1661.
Unless there is a story that will soften the risk aversion environment in the global markets, it seems that the dollar, as the reserve currency in which the real interest rate moves rapidly from the neutral zone to the positive, will continue to weigh on financial assets.
The PMI data announced for the world's largest economy last week was an important determinant. As reported by IHS Markit and S&P Global, the composite purchasing managers index (PMI), which is the leading indicator of economic performance in the country, remained below the threshold of 50 with a 49.5 points level in September. The data, which was 44.6 points in the previous month, thus signaled that economic activity lost momentum and contracted. In this period, as the leading sector of the economy, the manufacturing PMI maintained its strong course with 52 points, while the services PMI came in at 49.3 points.
The data, which revealed that the risks of recession in the world's largest economy have increased, supported international assets by creating a minor expectation that the US Federal Reserve (FED) will now downshift in interest rate hikes to stay on the soft landing path at its November meeting.
However, as of Friday, the market sentiment has almost completely reversed. Nonfarm payrolls (NFP) increased by 263,000 in September, against market expectations of 250,000, the US Department of Labor reported. In this period, it was understood that the labor market was extremely tight, with the unemployment rate falling to 3.5% despite the 3.7% estimates.
In other words, the strong course of labor conditions in the world's largest economy eased the FED's monetary tightening bill and fixed the interest rate hike expectations for the Federal Open Market Committee (FOMC) meeting on November 1 - 2 to 75 basis points, which will be the fourth. The 75 basis point tightening estimates for the November FOMC meeting in the CME has reached 75.5%.
On the other hand, the impact of the FOMC's influential figures' statements is seen. Chicago FED President Charles Evans underlined that the target interest rate may be needed to rise slightly above 4.5% early next year and stay there for a while. Minneapolis FED President Neel Kashkari pointed out that more interest rate hikes are likely to come, while New York FED President John Williams warned that the Bank is far from where it should be.
Under this outlook, interest rate expectations created a selling wave in the global bond market. The US 10-year bond yields, which retreated to 3.56% on October 4, have again reached the psychological 4% as of today. The 2-10-year yield curve is at the level of minus 0.349%.
It is possible to say that the intense sales in the bond market created a demand for the dollar. In today's initial pricing, the dollar index (USIndex) tested the highest level of nearly two weeks with 113.35. At this point, it can be stated that the developments in the Russo-Ukrainian war also support the dollar as a haven. The tension, triggered by the explosion on the Crimean Bridge, escalated yesterday morning when Russia launched missile attacks on important cities, including the capital of Ukraine, Kyiv.
Thus, VIX, the indicator of investor stress in the markets, exceeded 33 points. This dealt a big blow to SP500, the leader of the stock market. The SP500 index erased its two-week gains with 3 572 points in today's quotations. On the other hand, the strong dollar also puts precious metals under pressure. Ounce gold has fallen to the level of $1661.
Unless there is a story that will soften the risk aversion environment in the global markets, it seems that the dollar, as the reserve currency in which the real interest rate moves rapidly from the neutral zone to the positive, will continue to weigh on financial assets.
