After a grim few days on the market, it looks like some of the most worrying signs for investors are staying mixed. The three major indexes stalled out yesterday after notching some of their worst days of the year earlier this week on pressure from the Federal Reserve’s interest rate hikes. This morning, however, they rebounded strongly.
The UK’s unit of currency, the pound sterling, has been a point of contention for investors for weeks. The UK is in the grip of an unprecedented cost-of-living crisis as inflation hammers the value of the pound. The Bank of England has decided to intervene and will buy long-dated bonds to help calm the market down as investors scramble to buy “gilts,” the UK equivalent of Treasury bonds.
Meanwhile, the ten-year US Treasury note’s yield briefly jumped above 4% for the first time since 2008. This was a concerning record for investors and somewhat underscored the uneasy attitude seen on the stock market yesterday. Following the Bank of England’s emergency intervention in its own bond market, however, the US Treasury note’s yield calmed back down.
Stocks Rebound Strongly
Investors on Wall Street seem eager to see the economy bounce back from the recent lows caused by the Federal Reserve’s quantitative tightening plan. However, the road to recovery has been bumpy: yesterday, the stock market sputtered and lost momentum, with two of the three major indexes closing close to their lowest levels so far this year. This morning, however, the Dow Jones Industrial Average jumped by 1.01% to reverse the worrying trend. The S&P 500 also gained 1.01% after breaking to its lowest level in 2022 yesterday.
The tech-heavy Nasdaq Composite also received some relief, spiking by 0.79% shortly after the start of trading this morning. The biggest concern in the US market right now is the Federal Reserve. “We are committed to restoring price stability, but we also recognize, given these lags, there is the risk of overdoing it on the front end, and so I think we are moving at an appropriately aggressive pace,” says Minneapolis Fed President Neel Kashkari.
Yesterday, Chicago Fed President Charles Evans told reporters that he expects the Fed to increase interest rates by another full percentage point before the end of the year. This statement shocked some investors who assumed the most recent 0.75% increase was the last one the Fed would implement this year. Now, there are concerns that this austere market will make things harder for working-class Americans.
Bank of England Addresses Bond Market
Meanwhile, the Bank of England is contending with a financial firestorm after Finance Minister Kwasi Kwarteng unveiled a new series of unfunded tax cuts aimed at getting money back into the hands of working-class people. These tax cuts spooked many UK investors who quickly turned to gilts, the UK government’s equivalent to Treasury bonds.
Earlier today, the Bank of England released an official statement saying that it now plans to delay its gilt sales until October 31 to address the instability in the financial market. “Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability. This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy,” the Bank of England noted in the statement.
“In line with its financial stability objective, the Bank of England stands ready to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses.” Yields of 30-year and 10-year gilts dropped dramatically on the news, bringing things back to normal after a brief panic.
US Treasury Notes Fall in Sympathy
Yesterday, the ten-year US Treasury note’s yield briefly spiked above 4% in a pattern that raised eyebrows on Wall Street. However, after the Bank of England’s announcement earlier today, the pattern eased up as the ten-year note’s yield retreated to roughly 3.82%. This is good news for the US economy, as sky-high Treasury yields can be disastrous for the economy.
The economic picture is incredibly blurry right now as there are numerous factors all at play, making things complicated for the Federal Reserve and Wall Street. Many investors are now all but certain that a recession will occur sometime in the next twelve months.
“Our central case is a hard landing by the end of ’23,” says investor Stanley Druckenmiller. A “hard landing” refers to a worst-case scenario for the Federal Reserve in which the interest rate hiking plan creates a recession and obliterates job opportunities to reduce inflation and stabilize the US dollar. “I will be stunned if we don’t have [a] recession in ’23. I don’t know the timing but certainly by the end of ’23. I will not be surprised if it’s not larger than the so-called average garden variety.”