US yields rise on strong growth expectations, not just inflation

00:00:00: Oil prices and global yields continue to push higher, keeping pressure on equity valuations in supporting the US dollar broadly.

00:00:08: But the rise of U.S.

00:00:09: deals is not just an inflation story surprise.

00:00:13: it's rather appears driven by stronger growth expectations for the US economy.

00:00:18: a more hawkish federal reserve outlook obviously.

00:00:23: What does it mean for the Fed and its policy?

00:00:26: The yields in the US and across the globe, And the U.S.

00:00:29: dollar and broader financial markets we discuss.

00:00:32: So welcome to Swisscoats daily market talk.

00:00:35: today is Tuesday twenty-ninth of September.

00:00:38: I'm Ipeko Skardeshkeya.

00:00:40: everything i will say In this video Is based on my own opinion and analysis.

00:00:44: This

00:00:52: show brought you by SWISQUOTE.

00:00:55: So it's just another day, but the same story unfolding.

00:00:58: Oil prices continue to push higher yields rise as investors factor in expectations of higher inflation around the globe hence higher central bank rates and the coming months and quarters.

00:01:09: And a letter is weighing on equity valuations in the absence of major news and economic data.

00:01:15: In this context The Reserve Bank Of Australia Just announced this morning that its raising is supposed raised by twenty-five basis points.

00:01:24: it will take further action if needed.

00:01:27: Now the decision was wildly expected by analysts and a companion statement was hawkish, The Aussie dollar however tested to two hundred day moving average through upside but has not yet been able.

00:01:46: Rapid rise that we see in the US fields and notable hawkish shifts in Federal Reserve expectations cast shadow on other central bank policy outlooks, no matter how hawk-ish they are.

00:01:57: So the U.S.

00:01:58: dollar index has now stepped into overbuilt territory suggesting that the greenback may have been bought too rapidly in a short period of time so it could soon be time for downside correction.

00:02:10: The question is, what would trigger that when the yields are rising so rapidly in the US?

00:02:15: While looking at the yield curve I was saying yesterday remember that U.S.

00:02:19: Yield Curve has been flattening since federal reserve's latest monetary policy decision to hype interest rates and address inflation problem because the U. S. economy growth remains strong and job market improves allowing the Fed to hike interest rate to fight inflation.

00:02:35: The latter resulted in a faster rise of short-term yields.

00:02:39: the

00:02:39: U.S.,

00:02:40: on expectation that the Federal Reserve will be hiking its ways faster than expected previously to tame price pressures in the US, longer end of yield curve say ten year yields for example continue rise as well but the rise was slower then two-year yield.

00:02:55: that best captures a fed rate expectations.

00:02:58: so reasons is one.

00:03:00: investors continued bet stronger u.s growth.

00:03:03: they were worried about the U?

00:03:05: S debt and investors demand higher for lending to the US when debt is exploding.

00:03:11: For three, hawkish Fed helps anchoring longer-term inflation expectations.

00:03:15: so the former two reasons that I just cited apply a positive pressure on the long end of the yield curve.

00:03:21: but last health same pressures due to inflation worries by anchoring the longer term inflation expectations and this is what's really important.

00:03:30: So This Is The Highlight Of Today's Episode.

00:03:33: The rise in the US ten-year yield doesn't appear to be an inflation story only.

00:03:37: Surprise, I will say it again!

00:03:40: The rise of the U.S.

00:03:41: Ten Year Yield does not appears to be a inflation story ONLY.

00:03:45: Because looking into what's happening underneath, the ten year break even rates remains broadly stable around two point three percent more.

00:03:52: so that is part factors in the inflation expectations, but the real yields have risen sharply.

00:03:59: In other words ,the recent sell-off of U.S.

00:04:01: Treasury seems to be driven much more by stronger economic expectations for the US economy and a higher real term premium than by fresh rising longterm inflation expectation.

00:04:17: The letter or at least the pricing remains close inflation target.

00:04:24: And that's a big hand regarding how much the Fed could tighten its monetary policy now.

00:04:28: looking at the yield curve today, The US two to ten year yield differential is about thirty basis points.

00:04:35: So that's the lowest spread since February twenty-five and many analysts out there Now start asking whether we will be entering in new period of yield curve inversion In the U S where the shorter term peoples yield more than their longer maturity peers as strong economy could withstand higher rates.

00:04:54: But by raising the rates, The Federal Reserve would also slow down growth and potentially push the US economy into recession.

00:05:02: Now don't panic just yet because the good news is that last time two to ten year portion of U.S.

00:05:07: yield curve inverted And stay inverted between summer twenty-two and summer two thousand twenty four for more than Two years when recession never came to DUS AI boom.

00:05:19: an ample government spending could prevent the u.s.

00:05:21: economy from entering a recession as reserve, higher interest rates at that time to tame the post-COVID inflationary pressures.

00:05:29: Another good news today is that U.S.

00:05:31: economy growth remains robust thanks to big AI investment and ample government spending meaning that the US economy still has a position to withstand high interest rates from the Fed if underlying fundamentals remain unchanged.

00:05:45: Remember this MP's five hundred companies printed around fifty percent earnings growth in second quarter of earnings, expectations remain very strong and that despite rising yields.

00:06:00: The bad news is the rising energy prices will start being felt across US and other economies at some point in time Now, hopefully we are not there just yet.

00:06:24: At least when it comes to the S&P.

00:06:26: five hundred companies and technology companies especially because week started on a weak note duty of fresh rebound in oil prices on unresolved Middle East tensions.

00:06:37: but their S&p Five Hundred today is sitting Just one-and-a-half percent below its all time high level that was reached back in August this year whereas looking elsewhere The Dow Jones industrial index which has less technology heavy more the heat down around six percent from the summer all-time high level and the Russell two thousand index is down by more than eight percent right now.

00:07:01: From this summer peak as a confirmation that to smaller and non technology Parts of the market are feeling heat, rising energy prices and higher yields.

00:07:11: The macroeconomic setup will continue to matter for equity valuations as earnings announcements are scarce these days.

00:07:18: So today investors have an eye on US jobs opening data And tomorrow the PC inflation figures will be closely watched.

00:07:26: How stronger than expected job's data and stronger than expect inflation from the U.S would cement that the U?

00:07:33: S jobs market remains strong enough to withstand further rate hikes from the Federal Reserve.

00:07:39: Tame inflation and the latter could further strengthen U.S.

00:07:43: dollar boosts hands across the board, while also applying further positive pressure on yields.

00:07:48: But wait if you come back to earlier discussion about narrowing spread between two-and ten year yield in the US a further flattening of the yield curve could eventually at some point slow the U. S dollars appreciation against majors.

00:08:05: Initially the flattening has supported the dollar as yield rose right on stronger fed high beds, but if the curve continues to flatten and eventually inverse Marcus could start concluding that Fed expectations have simply gone too far.

00:08:19: Eventually forcing them to readjust those expectations in a less hawkish direction.

00:08:24: who would typically get to that point If The Yield Curve Inverted?

00:08:28: And That Could Help Keep The Euro Dollar And Cable Above Their Critical Fibonacci Retracement Level?

00:08:35: Since yesterday, distinguished between the positive trend building since Donald Trump's return to The White House and a medium-term bearish trend reversal in both of these pairs.

00:08:48: To me, the US dollar remaining on a bearish end against Europe would make sense from monetary policy perspective.

00:08:54: The European Central Bank remains very serious about fighting inflation while EU economies have shown surprising resilience higher energy prices and higher interest rates, and higher yields over the past few months.

00:09:09: It's a bit different for the Bank of England due to political pressures there.

00:09:13: but if you come back to your dollar outlook The euro dollars staying in that bullish trend would also match longer term out the full US dollar which is seen softening In continuation of so-called debasement trade as geopolitical and budget mess in the U S continues to develop long direction simply.

00:09:34: So this is all for today, I'm Ipekos Kardeskaya and thank you for joining me!

00:09:40: And Thank You For All Your Beautiful And Supportive

00:09:52: Comments!!

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