Surging energy prices intensified inflationary pressures on Tuesday, sending the yield on the 10-year Treasury note higher, while US equities rebounded after a global downturn at the start of the week.
US oil prices hit a seven-year high on Tuesday after Opec stuck to its crude production plans, snubbing calls from the White House to increase output to help tackle a growing global energy crunch.
Brent crude hit a three-year high while US natural gas futures surged, settling at their highest level since 2008.
The rise in energy prices helped to push one measure of inflation expectations in the US to the highest level since June. The 10-year break-even inflation rate rose to 2.45 per cent, pulling the 10-year Treasury yield up with it. The yield on the 10-year note rose 0.05 percentage points to 1.53 per cent, just below a three-month high hit last week.
“You get these supply chain issues and energy shortages . . . and that’s affecting break-evens, it’s affecting yields. That’s the reason we broke through 1.5 per cent on the 10-year,” said Andy Brenner, head of international fixed income at NatAlliance Securities.
The moves on Tuesday came as it emerged that activity in the US services sector improved last month ahead of Wall Street expectations, in a sign of the enduring consumer demand despite rising price pressures. The Institute for Supply Management’s index tracking economic activity in the services sector rose to 61.9 in September, up from 61.7 in August and above expectations for a slight fall.
Global equities have been rocked in recent weeks as investors grapple with the fact that the Federal Reserve could soon begin to reduce crisis-era stimulus as inflationary pressures persist.
The S&P 500 stock index climbed 1.5 per cent on Tuesday, reversing losses tallied on Monday when the benchmark closed at its lowest level since late July. The technology-heavy Nasdaq Composite, which fell on Monday as higher government bond yields and a temporary outage across Facebook’s platforms knocked richly valued growth stocks, advanced 1.7 per cent.
Across the Atlantic, the yield on the 10-year UK gilt rose to 1.08 per cent as the price of natural gas for November delivery in Europe rose 23 per cent to €117 a megawatt hour, up from €15 six months ago. The UK’s benchmark 10-year yield last month topped 1 per cent for the first time since March 2020.
“Inflation could be a short-term setback but it has planted the seed that the investment environment we’ve enjoyed for years cannot persist,” said Georgina Taylor, multi-asset fund manager at Invesco. Years of low interest rates have accentuated the appeal of riskier assets, including stocks.
Fed chair Jay Powell warned that supply chain bottlenecks and worker shortages sparked by the pandemic would persist. Jobs data on Friday are expected to show that US employers hired almost half a million new workers in September, which may strengthen the case to rein in crisis-era monetary support.
Europe’s Stoxx 600 closed up 1.2 per cent, led by tech and banking stocks. London’s FTSE 100 closed the day up 0.9 per cent.
In Asia, Hong Kong’s Hang Seng index earlier closed up 0.3 per cent, while the Nikkei lost 2.2 per cent.
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