Powell’s speech, Treasury yield, SPR: what moves the markets

Investing.com – U.S. Treasury yields rose to their highest levels since the financial crisis after a speech by Fed Chair Jerome Powell, dragging stocks lower. Crude rises as the US seeks to fill its strategic reserves, while UK retail sales slumped in September.

1. The 10-year yield hits 5%

Jerome Powell in his speech on Thursday before the Economic Club of New York left open the possibility of further rate hikes because the economy proved stronger than expected, but he also underlined the emerging risks and the need to move with caution.

“A variety of uncertainties, old and new, complicate our task of balancing the risk of tightening monetary policy too much with the risk of tightening too little,” he said.

“We will make decisions… based on the incoming data set, the evolving outlook and the balance of risks.”

Benchmark 10-year Treasury yields briefly rose to 5%, a level not seen since 2007, and stocks fell, with the S&P 500 index down 0.9%.

The recent surge in long-term bond yields suggests the market has embraced the idea that rates will stay higher for longer, with economic activity so far proving more resilient to rising borrowing costs than many had expected.

Yields also don’t look set to fall too much going forward, as the supply of US Treasuries can only increase as US President Joe Biden calls on Americans to spend billions more dollars to help Israel and Ukraine .

The rise in U.S. yields had repercussions elsewhere, with the Bank of Japan on Friday intervening in the Japanese government bond market for the fifth time this month after the 10-year bond yield rose to a new decade high.

2. Futures decline after Powell’s speech

US stock futures fell on Friday, in line with weekly losses, as investors worried about rising bond yields and potential fallout from the war between Israel and Hamas.

At the time of writing the Dow futures contract was down 25 points or 0.1%, S&P 500 futures were down 3 points or 0.1% and Nasdaq 100 futures were down 18 points or 0.1 %.

Major indexes closed lower on Thursday after the benchmark 10-year Treasury yield rose to levels not seen since the 2007 financial crisis [see above] following comments from Federal Reserve Chairman Jerome Powell that the central bank US is “proceeding with caution” in monetary policy decisions, while recognizing that ongoing signs of economic growth could justify further tightening of policy.

The major averages are at a loss for the week. The S&P 500 Index was down 1.2% through Thursday’s close, while the Nasdaq Composite was down 1.7% and the Dow Jones Industrial Average was down nearly 0.8%.

In recent days, investors have also taken some risk off the table in light of the outbreak of war in the Middle East and the uncertainty associated with it.

The economic data slate is largely empty on Friday, although appearances by Fed members Loretta Mester and Patrick Harker will draw attention in the wake of Jerome Powell’s speech.

More earnings are expected during the session, including from financial giant American Express (NYSE:AXP), regional banks Regions Financial (NYSE:RF) and Comerica (NYSE:CMA), and oilfield services firm Schlumberger (NYSE:SLB) ).

3. UK retail sales collapse in September

The British consumer is in trouble, having faced a cost-of-living squeeze over the past two years, amplified by a surge in energy costs following Russia’s invasion of Ukraine.

Data on Friday showed retail sales fell 0.9% in September from the previous month, much weaker than the 0.2% decline expected.

“Retailers reported that the decline in the month was due to continued cost of living pressures, as well as excessively warm weather which reduced sales of autumn clothing,” the Office for National Statistics said.

These economic difficulties are having political ramifications, with the ruling Conservative Party losing popular support.

4. China Evergrande reviews debt restructuring agreement

China’s real estate debt crisis continues this Friday, after China Evergrande Group (HK:3333) said it will review the terms of a proposed offshore debt restructuring deal, without providing details.

The struggling property firm’s restructuring plan failed to meet regulatory requirements last week, prompting bondholders to raise doubts about a possible liquidation.

Meanwhile, its peer Country Garden (OTC:CTRYY) also missed the repayment of a $15 million coupon, risking default.

Failure to pay would put the developer at risk of defaulting on its nearly $11 billion in outstanding offshore bonds and could trigger one of the largest corporate debt restructurings in China.

This would likely exacerbate the country’s housing crisis and could delay the prospect of a recovery in China’s overall economy.

5. Crude oil is supported by US plans to supply the SPR

Crude oil prices rose on Friday, in line with weekly gains, on worsening geopolitical tensions in the Middle East and US plans to start replenishing strategic oil reserves.

At the time of writing, US crude futures were up 1.4% at $89.61 a barrel, while the Brent contract rose 1.3% to $93.56 a barrel.

Both contracts are on track to close positive for the second consecutive week, with increases between 1.5% and 2.2%, as the explosion of a hospital in Gaza this week and the anticipated invasion of land by Israeli troops have increased fears of an extension of the conflict into this important oil-rich region.

The market also received a boost from news that President Joe Biden has revived his offer to replenish the Strategic Petroleum Reserve, which has been heavily depleted.

The Department of Energy announced on Thursday two separate crude oil purchase offers totaling 6 million barrels, to be delivered between December of this year and January 2024.

The U.S. government has drawn about 200 million barrels from the SPR since the start of 2022, bringing the reserve to its lowest level in nearly 40 years, in an effort to counter surges in gasoline prices after the start of the war between Russia and Ukraine.

This article is originally published on it.investing.com

Beth Malcolm

Beth Malcolm is Scottish based Journalist at Heriot-Watt University studying French and British Sign Language. She is originally from the north west of England but is living in Edinburgh to complete her studies.