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Week in Review: U.S. Treasury Yields Rise

Advice & Comments

21 Aug 2023

Longer-dated U.S. Treasury yields hit a 10-month high this week as investors focused on the prospects of longer-lasting high interest rates and a struggling Chinese economy.

Longer-dated U.S. Treasury yields hit a 10-month high this week as investors focused on the prospects of longer-lasting high interest rates and a struggling Chinese economy. This week’s broad risk-off follows the publication on Wednesday of minutes from the last Federal Reserve (“Fed”) meeting that suggested officials are considering tighter policy, dampening hopes that the central bank was done raising rates. Fed officials meet next month (September 19-20, 2023) to determine whether to raise interest rates for the 12th time or hold them steady. Chairman Powell’s upcoming remarks at the annual economics symposium in Jackson Hole, Wyoming, later this month will be closely scrutinized by investors listening for any clues or indications of the Fed’s view on rates going forward.



The Fed hiked interest rates by 25 bps to 5.25%-5.50% at its July 2023 Federal Open Market Committee (“FOMC”) meeting. Powell, following the July decision, emphasized that each meeting will be open to evaluation depending on the data at hand.



Some officials think the Fed has already raised its benchmark lending rate enough to curb inflation, with financial markets seeing more than a 90% chance the central bank will agree to pause rate hikes next month, according to the CME FedWatch tool.



U.S. consumer spending held up well in July as inflation slowed, with retail sales turning in a stronger-than-expected showing for the month, the Commerce Department reported Tuesday. Retail sales jumped 0.7% over the month, roughly double consensus estimates. Excluding the volatile auto segment, sales rose 1.0%, bringing their year-over-year gain to 3.2%.



Major US indices ended lower this week, with the Dow Jones off 2.2%, the S&P 500 2.1% lower and the Nasdaq Composite shedding 2.6%.



European markets retreated on Friday, tracking cautious global sentiment. In local currency terms, the pan-European Stoxx 50 index fell 2.51% for the week on intensifying concerns about the outlook for the Chinese economy and the prospects of higher European interest rates. The UK’s FTSE 100 Index followed the negative global sentiment dropping 3.48% for the week.



The UK’s annual inflation rate dropped sharply in July to a 15-month low, according to official data, driven lower by falling energy and food prices. July’s price growth of 6,8% (from 7,9% in June) was in line with analyst predictions, including the Bank of England.



In other economic news, data published on Tuesday showed that UK unemployment increased in the three months to the end of June. The one exception to this evidence of a cooling labour market was annual pay growth, which at 7.8% was the highest recorded since 2001. The increase in earnings may well persuade the Bank of England to announce yet another increase in interest rates when its monetary policy committee (MPC) meets next month.



In Asia, shares headed for their sixth daily decline against the backdrop of continued worries about China’s flagging economic recovery and higher global interest rates. Official data for July revealed that China’s economic activity continued to weaken as well as further evidence of a property market downturn. The People’s Bank of China delivered its strongest ever pushback against a weaker yuan via its daily reference rate, cutting its medium-term lending facility rate by 15 basis points to 2.5% as well as lowering its seven-day reverse repurchase rate (a short-term policy rate) by 10 basis points. Over the week the Shanghai Stock Exchange Index gave up 1.80%, while in Hong Kong, the benchmark Hang Seng Index plummeted 5.89%, its biggest weekly drop in five months.



Amid concerns of China’s slowing, Japan’s stock market also declined over the week, with the Nikkei 225 Index ending 3.2% lower. On the data front, Japan’s economy posted its third straight quarterly expansion, government data showed Tuesday, as robust export growth contributed to an annualized 6% expansion in the second quarter. This followed an annualized 2.7% growth in the first quarter, pointing to a continued post-Covid recovery for Japan’s economy.



Oil headed for its first weekly loss since June as concerns over economic weakness in China and potentially even tighter monetary policy in the US combined to overshadow signs of a healthy physical market. Oil prices dropped about 2% for the week but remain markedly higher from its lows in June, driven largely by supply cuts by OPEC+ members Saudi Arabia and Russia.


Market Moves of the Week:

South Africa’s second-quarter unemployment rate fell to its lowest level since the first quarter of 2021, beating analysts’ expectations, as employers added jobs in sectors including construction and trade. The official jobless rate fell to 32.6% in the second quarter from 32.9% in the prior quarter. Statistics South Africa said the number of people with jobs rose to 16.3 million in April-June, approaching the pre-COVID level of 16.4 million and the seventh consecutive quarterly rise in employment. The South African Reserve Bank estimates the economy will grow at 0.4% this year, compared with about 2% had it not been for the power rationing.



On the political front, a group of South African opposition parties that aims to end the ruling African National Congress’ three-decade hold on power agreed Thursday to form a coalition government should they collectively win a majority in next year’s Parliamentary elections. The seven signatory parties to the so-called Multi-Party Charter for South Africa also agreed that they won’t enter into any “working arrangement or co-governing agreements” with the ANC or the populist Economic Freedom Fighters at national or provincial government level following the elections. The parties will contest the elections as individual entities, and representation in a post-election coalition government would be “approximately proportional” to electoral support.



Chinese President Xi Jinping will attend the BRICS summit in South Africa next week, amid heightened China-US tensions. Xi will make the trip to Johannesburg starting Monday at the invitation of South African President Cyril Ramaphosa. The trip will also give Xi a chance to make his case for BRICS expansion, something India and Brazil have opposed. China has been a keen proponent of the bloc comprising the Asian nation, Brazil, Russia, India and South Africa that was officially formed in 2009-2010. Russian President Putin will participate virtually to avoid South Africa having to carry out an International Criminal Court arrest warrant on him.



The FTSE/JSE All Share Index ended the week 5% lower. Resources were the worst performing sector on the JSE - down 9.3% for the week, followed by the Financial (-4.68%) and Industrial sectors (-2.95%). The rand firmed on Friday to end the week below R19 to the US dollar after another volatile week in currency markets.


Chart of the Week:

As per the chart above the current fed funds futures market is pricing in a small chance of another hike by November, when the terminal rate is predicted to be reached. The Federal Open Market Committee meeting in July as well as this week’s publication of the minutes of the meeting hasn’t shifted that market view.

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