Treasury Yields Climb, Stocks Slide As Investors Reset Interest Rate Expectations

Building on the positive Manufacturing PMI reports that came out from China over the weekend and North America yesterday, European Manufacturing PMI reports out this morning have generally come in better than expected with Italy and the UK climbing back above 50 and into expansion territory.

Indications of an improving global economy have sparked rallies in commodity prices with US Crude Oil climbing 1.4% and metals surging, including gains of 1.0% for Copper, 1.1% for Gold, 2.6% for Silver and 2.4% for Platinum. Improved sentiment toward China in particular sent the Hang Seng up 2.4%.

On the other hand, signs of a resilient global economy have taken pressure off of central banks to cut interest rates any time soon as Fed Chair Powell mentioned last Friday. Meanwhile, a rising Prices Paid component of yesterday’s US ISM report and climbing commodity prices suggest that inflation may not have been defeated yet. Because of this, treasury yields have been climbing. The US 10-year treasury note yield has jumped from near 4.20% yesterday morning to over 4.35% this morning, while the 10-year German Bund yield is back up above 2.40% and the UK 10-year Gilt yield is back up above 4.00% today, suggesting the balance of expectations has shifted from neutral-dovish back to neutral-hawkish.

This shift in sentiment has been most apparent in cryptocurrencies which are getting hammered this morning with Bitcoin down 5.2% and Ether down 4.6%. US index futures have been trending down through the morning with the three main contracts currently down 0.4%-0.5%. European markets are steady with the Dax down 0.1% and the FTSE up 0.2%.

Four Fed speakers today and five Fed speakers tomorrow, including Chair Powell again, may shed more light on what US central bankers are thinking. Tomorrow also brings US ADP payrolls and Service PMI reports for some countries.

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