If there’s one lesson to be drawn from the financial world lately, it’s that when the Federal Reserve speaks, everyone listens—whether they believe it or not. Just a few months ago, markets were licking their lips at the prospect of four rate cuts by the end of 2023. Fast forward to now, and the mood has swung 180 degrees. The 10-year note yield has touched 4.45% for the first time since November 2007, effectively sidelining any talk of rate cuts until at least September 2024.
Remember two days ago when that spike in the ten-year note yield to 4.45% seemed like a glitch? Well, it’s real today, and climbing fast. The bond markets are like a teenager in a mood swing—they’re making historic moves every day. It’s as if the market just discovered the concept of change, and with the next few months looking to be rather interesting, one might need more than just a bag of popcorn.
Fed policy, historically, has worked through the power of words. If they say they’ll raise rates, the market traditionally adjusts even before the gavel bangs. But there’s a fly in the ointment. Over the past two years, market scepticism towards the Fed’s statements has skyrocketed. Now, the Fed is essentially telling the market, “Told you so,” as they make good on their earlier hints.
In the wake of this sudden pivot, the repercussions are being felt far and wide. Oil prices, for instance, are on a downswing. West Texas Intermediate (WTI) has nosedived below the $90 per barrel mark, while Brent futures fell by 0.4% to $93.08 a barrel. Why? Because higher interest rates could be a death knell for economic activity and crude demand. The Federal Reserve’s announcements also led to a stronger dollar, dealing another blow to financial markets around the globe.
Amidst this turmoil, the supply considerations for oil are, curiously enough, still bullish. US inventories haven’t shrunk as much as expected, but a surprising draw in gasoline and distillates suggests the market isn’t quite ready to lie down and whimper. Even JP Morgan’s analysts are warning that Brent could soar as high as US$120 a barrel.
On the fiscal front, the divergence between countries is stark. While the US’s financial position is described as nothing short of a disaster, Australia is in the unique position of having a budget surplus for 2022-2023. But even Down Under, interest costs are rising, as Stephen Koukoulas, Treasury Head of Global Strategy and Advisor to the PM, pointed out.
The bond market is in a state of frenzy. With 3-year yields now at 4.05% and 10-year yields at 4.30%, the aftershocks of the Fed’s announcements are palpable. Michael Howell, CEO of CrossBorder Capital, poses an intriguing question: Is China dumping US treasuries to defend its own currency, thereby reducing its appetite for them to 2009 levels?
So, what’s the takeaway here? Maybe it’s time for market participants to start taking the Fed seriously, especially if they want inflation back below 2%. With such seismic shifts in both oil and bond markets, not to mention divergent fiscal strategies across nations, it’s clear that the “boring” days of finance are long behind us. Sit tight; the rollercoaster ride isn’t over yet.
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