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WEEKLY SUMMARY: The US yield curve tumbles on hawkish Fed speaks
US equities gave back a portion of the previous week’s strong gains and closed modestly lower for the week. Growth stocks lagged value-oriented shares. The energy sector underperformed, however, as European oil and natural gas inventories reached near-peak levels. Dispelled reports of a Russian missile strike on Polish territory sparked a brief sell-off on Tuesday, but trading volumes remained muted for much of the week. The U.S Treasury yield curve inverted further during the week, driving the inversion in the two-year/10-year curve segment to its deepest level in over 40 years. Short-term U.S. Treasuries repriced to higher yields, particularly after James Bullard said that the Fed’s terminal policy rate should reach a minimum level of 5% and may need to go as high as 7% to achieve the central bank’s inflation objectives. There were however some “dip buying” in longer maturities, which helped push long-end yields downward. In Europe, the STOXX Europe 600 Index ended modestly higher in local currency terms. Euro bond yields held near recent highs as ECB Lagarde said interest rates need to rise more as policymakers seek to fight inflation. In the UK, Finance minister Hunt raises taxes but delays large spending cuts. UK inflation hit a 41-year high of 11.1% in October. In Asia, mainland Chinese stocks were modestly positive for the week while Japanese stocks fell. The dollar rose while cryptos were stable.
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Most of US equities indices rose to record highs, as investors wagered that a “red sweep” (Republicans winning Presidency, Senate and Congress) would result in faster earnings growth, looser regulations, and lower corporate taxes. The small-cap Russell 2000 Index surged 8.57% for the week but was the sole benchmark to remain out of record territory. Meanwhile, the Dow Jones hit 44.000 for the first time while the S&P 500 closed just shy of 6,000, up 4.7% for the week, its best weekly gain in almost a year. On Thursday, the Fed announced a 25bps rate cut, its first easing move since cutting rates by 50 basis points in mid-September. In terms of economic data, the October ISM services sector activity came in at 56.0, well above expectations and the best reading since August 2022. U.S. Treasuries generated positive returns heading into Friday, as yields largely ended lower than where they ended the previous week.