Stocks wavered to start the new week, with rising bond yields and inflation in focus as investors continued to monitor developments in the Russia-Ukraine war.
Futures for the
Dow Jones Industrial Average
ticked up 20 points, or less than 0.1%, after the index moved 153 points higher on Friday to close at 34,861.
futures signaled a start 0.1% lower with the
set to drop 0.3%.
Overseas, the picture was more mixed. The pan-European
rose 0.7% and the
ended less than 0.1% higher, paring earlier losses.
Bond yields are rising as investors face an environment of rising interest rates from the Federal Reserve in the year ahead amid historically high inflation. The yield on the benchmark 10-year U.S. Treasury note rose above 2.51% on Monday, the highest levels since early 2019; elevated yields are linked to expectations of both inflation and interest rates increasing.
“Market pricing suggests the Fed could do two back-to-back 50 basis-point [interest-rate] hikes at the next two meetings,” said Neil Wilson, an analyst at broker Markets.com. “Recent rhetoric from several Fed officials indicate growing support for a more hawkish move.”
Higher yields also discount the present value of future cash, putting pressure on tech stocks in particular—because high-growth companies like those in the tech sector have market valuations banking on profits years in the future. In turn, the tech-heavy Nasdaq index was on track to underperform on Monday.
A wave of economic data, including the personal-consumption expenditures (PCE) price index, which is the Fed’s preferred measure of inflation, will be in focus in the week ahead. consumer-price index (CPI) data for February, released earlier this month, showed inflation at a four-decade high. A hot PCE reading could further stoke expectations that the Fed will act faster and more aggressively in raising rates.
“Given just how far the Fed is behind the curve it’s fair to say that if the post [2008-09 financial crisis] cycle could be erased from people’s memory banks, then I think markets might be pricing 300-400 basis points of hikes this year,” said Jim Reid, a strategist at Deutsche Bank. “However the fact that the last decade was so moribund from an activity and inflation point of view means that markets still refuse to believe the Fed can get very far.”
In another sign of expectations that the Fed will tighten monetary policy more than was once thought, the rise in shorter-duration bond yields outpaced that in longer-duration bonds. The yield curve also delivered a warning sign with a so-called inversion, with the yield on the 5-year U.S. note—2.63%—rising above the 30-year yield at 2.59% for the first time since 2006.
“When yield curves begin to invert, it’s usually a signal that investors have lost their confidence in the economic recovery story and are now preparing for a slowdown or possibly a recession over the next few quarters,” said Hussein Sayed, a strategist at broker Exinity.
The Russia-Ukraine war, which has roiled equity and commodity markets in the last month, remained another area of focus for investors. European stocks, which have been particularly sensitive to developments in the conflict, were higher as investors continued to watch for signs of a diplomatic resolution.
Chinese stocks came under pressure, though managed to end in the green, amid a Covid-19 wave in China that has prompted new lockdown measures in Shanghai, the largest city and financial center. The new restrictions have also added downward pressure on oil prices, which have been elevated since the start of the Russia-Ukraine, with tight global supply exacerbated by sanctions on Russia.
Futures for U.S. benchmark West Texas Intermediate crude fell 4% to below $109.50 a barrel, having closed out last week near $114.
“The Shanghai rolling lockdowns have prompted some consumption fears in China and pushed oil prices lower today,” said Jeffrey Halley, an analyst at broker Oanda. “Oil is already taking back some of those early losses and the fall is likely to be a temporary…