US government bond yields surged and stock futures rose, as investors digested Federal Reserve Chairman Jerome Powell’s more aggressive tone on reining in inflation.
Futures for the S&P 500 and Dow Jones Industrial Average advanced 0.3% and 0.5%, respectively, on Tuesday. Contracts for the tech-focused Nasdaq-100 rose 0.2%. Major US stock indexes ended lower Monday after Mr. Powell said the Fed was prepared to raise interest rates in half-percentage-point steps if needed to tamp down inflation.
In the US Treasury market, a selloff in government bonds intensified, sending the yield on the 10-year US Treasury note climbing to 2.341%, from 2.315% Monday. That marks its highest yield since May 2019 before the Covid-19 pandemic upended financial markets. Yields rise when bond prices decline.
Stocks, bonds, commodities and currencies have been whipsawed by volatility for the last month as investors have tried to assess the economic fallout from Russia’s war in Ukraine. Many investors now fear that the war could keep sustained inflation and stunt economic growth in the US and Europe.
This week, however, investors were thrown a new curveball when Mr. Powell spoke Monday and struck a tougher tone than the one he used when the Fed lifted interest rates from near zero last week. He repeatedly stressed the uncertainty facing the central bank and said officials are ready to shift their policy in a more disruptive direction.
“The message that came out of the [Fed] meeting last week is that they are going to be tightening [monetary policy] but the US economy is resilient enough to withstand that,” said Huw Roberts, head of analytics at Quant Insight, a data analytics firm. “The equity market thing to emphasize the economic resilience portion.”
Yesterday’s comments rattled some of those expectations, he said. “The big variable now is the economic growth side of things,” Mr. Roberts continued.
Many investors are keeping a close watch on the so-called yield curve, which measures the spread between short- and long-term rates and is often seen as a strong indicator of sentiment about the prospects for economic growth. Recently, the gap between yields on shorter-term and longer-term US Treasury bonds has been shrinking, stirring anxieties that the bond market is close to signaling a potential recession.
The two-year Treasury yield—which is especially sensitive to changes in monetary policy—climbed to 2.164% Tuesday, from 2.132% Monday.
To get a better read on the US economic landscape, investors on Tuesday morning will parse data from the Federal Reserve Bank of Richmond on manufacturing activity. The economic data, due at 10 am ET, is expected to register an increase from the prior month.
In premarket trading in New York, shares of banks rose, tracking similar moves in Europe. In the US, Morgan Stanley added 1% and Citigroup added 0.7%. In Europe, Societe Generale advanced 1.8% and Deutsche Bank jumped 3.8%.
In other sectors, Nike advanced 6% in premarket trading in New York after it reported revenue that beat analyst expectations. Shares of Okta slumped 7.1% after a hacking group posted screenshots purporting to show that it had gained access to Okta.com’s administrator and other systems. The company said Tuesday that a preliminary investigation found no evidence of any ongoing malicious activity, saying the screenshots were most likely related to a January security incident.
In the energy markets, futures for Brent crude, the international benchmark, rose 0.6% to $116.34 a barrel in a volatile trading session. Last week, Brent prices fell below $100 before reversing and climbing higher. Support for a European Union-wide ban on the purchase of Russian oil is growing inside the bloc, raising the possibility of more volatility ahead.
In Europe, the pan-continental Stoxx Europe 600 increased 0.5%, putting it on pace to rise for a fifth consecutive session.
In Asia, major indexes also largely ended higher. Hong Kong’s Hang Seng gained about 3.2%, while Japan’s Nikkei 225 rose 1.5%. China’s Shanghai Composite advanced 0.2%.
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