US stocks and government bonds rose on Wednesday as traders tried to decipher messages about the future path of monetary policy against a gloomy economic backdrop.
Wall Street’s broad S&P 500 was up 0.8 percent by early trade in New York, while the Nasdaq Composite, which has many technology stocks more sensitive to interest rate changes, was up 1 percent.
In bond markets, the yield on the 10-year U.S. Treasury note — seen as a gauge of borrowing costs globally — fell 0.06 percentage point to 3.28 percent as the debt instrument rose.
They had treasuries sold with British gilts in the previous session, after a positive survey on the services sector in the world’s largest economy, expectations of an aggressive tightening of monetary policy by the US Federal Reserve were fueled.
Markets are assessing the possibility of a 0.75 percentage point increase in interest rates by the Fed at the end of September meeting, which would be the third consecutive increase of this magnitude. The Fed’s current target range is 2.25 percent to 2.5 percent.
Thomas Barkin, president of the Fed’s Richmond branch, said the Financial Times this week that the U.S. central bank should raise interest rates to a level that restrained economic activity “until we are really convinced that we have put inflation to bed.”
Elsewhere, short-term British bonds edged higher on Wednesday, with the two-year bond yield falling 0.15 percentage point to just over 3 percent, while the 10-year bond yield lost 0.07 percentage point to 3.03 percent.
The rise in gold prices came as newly appointed British Prime Minister Liz Truss was poised to announce a package this week aimed at easing the pressure on households and businesses from soaring energy prices, which some analysts said , may reduce inflationary pressure in the near term.
“I think this is a short-term recovery,” said James Atty, chief investment officer at Abrdn. “Overall, the setup for gilts looks very shaky,” he added, citing the Bank of England’s struggle to contain inflation.
Hugh Peel, the Bank of England’s chief economist, told the House of Commons finance select committee on Wednesday that the Trust’s plans to freeze electricity bills were can force the central bank to raise interest rates despite the reduction in the inflation rate in the coming months.
The moves in bond markets on Wednesday also followed a disappointing trade release from China, which showed it exported less than expected in August. In recent months, investors have been scrutinizing economic data to see how much central banks around the world will tighten monetary policy amid a prolonged slowdown.
China’s exports rose 7.1 percent year-on-year last month, compared with an 18 percent rise in July. Economists polled by Reuters had forecast growth of 12.8 percent. The numbers were “a sign that slowing global growth and normalizing consumption patterns are having an impact on demand for Chinese goods,” wrote Sheana Yue, China economist at Capital Economics.
A separate report showed that German industrial production fell 0.3% month-on-month in July, compared with a 0.8% rise in the previous month. Economists had expected a 0.5 percent drop.
The European Central Bank is due to announce its own monetary policy decision on Thursday. Several Wall Street banks said they expected a whopping 0.75 percentage point increase in borrowing costs. In July, the ECB raised rates by a sharper-than-expected 0.5 percentage point to zero for the first time in more than a decade.
But analysts are divided on how far and how fast the ECB will move, with some worried that higher rates will hurt growth in the region. Matteo Camineta, senior economist at Barings Investment Institute, forecasts a 0.75 percentage point increase on Thursday, followed by smaller increases in October and December.
“I think they won’t be able to do more than that, because as we move into [autumn] the evidence of a very deep recession will be evident,” he said.
Europe’s regional Stoxx 600 stock index fell 0.6 percent. Hong Kong’s Hang Seng closed 0.8% lower.