Are Rates Going to Stay High For Longer?
Broad markets saw a sea of red on 19 August 2022. Almost no asset classes were spared including stocks that have been on an unstoppable bull rampage since June. Crypto recovery also met a huge setback as key cryptos such as Bitcoin fell more than 10% in a single day. The mood is as if we are back in the early part of 2022 when practically everything was selling off. But on the month, stocks and REITS are still up though.
However, it looks like risks may be off the table again. We have seen this every now and then. Sometimes good news isn't always perceived as good news. A series of better-than-expected economic numbers and hawkish talks from the Fed reignites fear that rates might stay higher for longer if inflation proves to be stickier. Incidentally, from a technical perspective, the S&P 500 was also approaching a closely watched key technical resistance level - the 200D MA.
In terms of the Fed Funds rate hike outlook for the year, there aren't a lot of changes. For Sep FOMC, we are still looking at a 57.5% chance in favor of a 50 bps hike. And the expected year-end Fed Funds rate still hovers at 3.7%. However, there are more noticeable movements in the Treasury yields at longer maturities. While the yield curve remains inverted, the level of inversion has narrowed by as much as 14 bps over the past week as the 10Y rate moved up. This means, at least for now, the market expects rates to stay higher for a longer period.
While the episode could turn out to be more long-drawn than initially thought, things can still flip if there are clearer signs of inflation and the labor market cooling down. But in the meantime, markets will continue to scrutinize the labor reports and inflation figures.