Marketmind: Rate hikes back on markets’ radar

A look at the day ahead from Sujata Rao.

Ouch. For all the central bank assurances about the inflation spike being transitory, investors are struggling to look past the biggest annual rise in U.S. inflation in 31 years.

A stampede for inflation-protected Treasuries (TIPS) sent 10-year yields on such securities to new record lows below -1.2%.

That’s roughly 70 basis points below this year’s peak.

Wednesday’s 1% dollar surge and an 11 bps rise in nominal Treasury yields has been followed up today by Japanese data showing wholesale inflation at 40-year high. Wall Street took a beating unsurprisingly; the Nasdaq, laden with tech stocks sensitive to higher longer-term yields, lost 1.7%.

World stocks have stabilised though, after the previous day’s 0.7% tumble, supported by news that stricken Chinese developer Evergrande had come good on bond coupons, dodging default for the third time in a month. The bonds in question have risen around half a cent in price.

While money markets are betting central banks will get more aggressive next year — the first Fed and ECB rate rises are now seen in July and September respectively — shares have for now at least support from the deeply negative “real” interest rates.

On an inflation-adjusted basis, 10-year U.S. yields plunged to a new record low below -1.2%, keeping alive the there-is-no-alternative (TINA) narrative.

Cue, Bitcoin hitting new record highs and Amazon-backed EV firm Rivian valued at $100 billion after this year’s biggest IPO.

And how worrying really is the inflation picture?

Forward inflation indicators may offer reassurance. Ten-year breakevens, the level of expected inflation, is 2.7% and 5-year breakevens are 3%. Well above the Fed target, yet nowhere near the current 6.2%.

European shares are opening weaker but companies from a range of sectors — Burberry, Siemens, Arcelor Mittal, Delivery Hero and Generali — continue to deliver upbeat Q3 earnings.

Finally, not much cheer for Britain where the economy grew 0.6% in September. It remains smaller than where it was in February 2020.

Key developments that should provide more direction to markets on Thursday:

-Swiss National Bank governing board members Andréa Maechler and Thomas Moser speak 1730 GMT

-Emerging markets: South Africa budget 1200 GMT; Mexico, Peru central banks expected to raise interest rates

– U.S. markets closed

(Reporting by Sujata Rao; editing by Dhara Ranasinghe)