Marketmind: Ten-four, Treasury yields soar

A look at the day ahead in U.S. and global markets from Mike Dolan

Spooked by a resurgence of already high global inflation and the ire of central bank hawks, the bond market is running scared.

The remarkable sight of 10-year Treasury yields back above 4% for the first time in almost four months is only matched by two-year yields at 15-year highs stalking 5%.

Awaiting Federal Reserve chief Jerome Powell’s semi-annual Congressional testimony next week, as well as a February reality check on the red hot jobs market, futures are starting to price the chance a return to half-point Fed rate hikes this month.

Minneapolis Fed President Neel Kashkari, a voter in the rate-setting committee in 2023, provided the latest spur on Wednesday by saying he was “open-minded” about a 50 basis point hike at the March 21-22 meeting.

Weekly jobless claims on Thursday and the latest Fed speakers take on unusual importance in such a febrile rates market.

Futures pricing now shows a 20% chance of a half point move to 5.0-5.25% and possibility of a “terminal rate” as high as 5.5-5.75%. And 6% Fed rates that seemed fanciful only a month ago are now being openly discussed by banks.

Even though some Fed reports suggest these rates assumptions are too aggressive, inflation expectations in U.S. and European markets are rising in tandem. Two-year “breakeven” inflation assumptions in the U.S. bond market are almost 3%.

Despite year-on-year oil prices now tracking declines of 25%, European inflation fears are a key feature of this week’s nervousness.

Euro zone inflation fell less than expected last month and underlying price growth surged, reinforcing market expectations that the European Central Bank may have another 150bp of rates hikes to go to get to a terminal rate of 4%. Benchmark German 10-year bond yields soared to 11-year highs at 2.77%.

Uncomfortable ECB discussions about the nature of the inflation problem and signs from Bank of England chief Andrew Bailey that further UK rate rises may not be inevitable made many in the markets wonder if they would keep pace if the Fed takes rates much higher from here.

The dollar gained ground again across the board as a result, with rising geopolitical tensions seeing rising demand for the U.S. currency.

China is underscoring the New Year global economic pickup, meantime, and its government may be planning for a 6% growth target. Four Reuters sources said China was likely to aim for growth of up to 6%, while three others said China was targeting 5%-5.5%. They all spoke on condition of anonymity as the discussions were held behind closed doors.

Against the quaking bond market, downbeat stocks seem to be holding up reasonably well so far and European bourses and U.S. futures are down less than 1% on Thursday.

But with U.S. dollar cash now returning about 5% or more, it’s a harder case to make to stay invested with such uncertainties on the horizon.

Elsewhere, London Stock Exchange reported slightly stronger than expected 2022 income on Thursday and hailed its integration of Refinitiv as a success as it announced plans to buy back more of its shares.

Key developments that may provide direction to U.S. markets later on Thursday:

* U.S. weekly jobless claims, Q4 Unit Labor Cost revision

* U.S. Federal Reserve Board Governor Christopher Waller, Minneapolis Fed President Neel Kashkari speak; European Central Bank board member Isabel Schnabel speaks; Bank of England chief economist Huw Pill speaks.

* European Commissioner Valdis Dombrovskis meets U.S. Treasury Secretary Janet Yellen and U.S. Trade Representative Katherine Tai in Washington. G20 Foreign Ministers meeting in New Delhi

* U.S. corp earnings: Broadcom, Costco, Best Buy, Hormel Foods, Kroger, Cooper, Hewlett Packard,

Graphics

World economy surprising in 2023 https://fingfx.thomsonreuters.com/gfx/mkt/gkplwljemvb/One.PNG

Quits rate comes off the boil https://www.reuters.com/graphics/USA-FED/EMPLOYMENT/jnvwyalalvw/chart.png

U.S. mortgage demand https://www.reuters.com/graphics/USA-STOCKS/gdpzqmnqbvw/mba.png

Salesforce revenue growth https://www.reuters.com/graphics/USA-STOCKS/SALESFORCE/egpbyolmrvq/chart.png

(By Mike Dolan, editing by Jane Merriman mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)