Bond Yields Climb on Hawkish Central Bank Warnings: Markets Wrap

An electronic ticker displays stock figures in Pudong's Lujiazui Financial District in Shanghai, China, on Wednesday, June 21, 2023. China's yuan weakened past the closely watched 7.2-per-dollar level as investor sentiment soured on a lack of aggressive stimulus and Beijing signaled a level of comfort about the declines. Photographer: Raul Ariano/Bloomberg

(Bloomberg) -- Bond yields climbed after major central banks warned about the potential for more interest-rate hikes, with officials signaling they're nowhere near ready to declare victory over inflation.

Treasury two-year yields hit the highest since March as Jerome Powell said the US may need one or two more rate increases in 2023 while the Bank of England cautioned it may have to hike again after delivering a half-point boost. A key section of the German yield curve inverted the most since 1992 on economic concern. Norway's krone led gains among developed currencies as the nation's officials pledged more aggressive tightening.

Equities struggled for direction throughout most of the session, with the S&P 500 closing with a mild gain after a three-day slide. A renewed rally in megacaps like Amazon.com Inc., Apple Inc. and Microsoft Corp. fueled the rebound, with the Nasdaq 100 up more than 1%. As stocks gained traction, Wall Street's favorite volatility gauge, the VIX, slumped below 13 to the lowest level since January 2020.

Read: Central Bankers Grab for Credibility They Wrecked: Surveillance

“We've seen central banks say: ‘Oh, we haven't done enough.' They thought at the beginning of the year they had, and everybody thought we were going into recession, and now what we're seeing is the data sequentially move away from that,” said Phillip Colmar, global strategist at MRB Partners. “If you're not in a recession, it's also really hard to get core inflation down because you need to weaken the employment sector in order to do so.”

To Kristina Hooper, chief global market strategist at Invesco, if the Federal Reserve does tighten two more times this year, it risks sending the economy into a “significant recession.”

“I'm sounding like a broken record, but I'll say it again: There is a lengthy lag between when monetary policy is implemented and when it actually shows up in the real economy data,” Hooper added. “We haven't seen much of an impact yet because of that lag. That's why we have to worry so much about overkill.”

US equities are in for a tumultuous second half of the year as the lagging impacts of aggressive monetary tightening by the Fed catch up to the economy, according to JPMorgan Chase & Co.'s Marko Kolanovic.

“In equities, absent pre-emptive Fed easing – vs. Fed dots that imply two more hikes by year-end – we expect a more challenging macro backdrop for stocks in 2H, with softening consumer trends at a time when equities have re-rated sharply,” Kolanovic said Thursday in his mid-year outlook note to clients.

Low Conviction

While US equities stormed into bull territory in June, investors haven't bought into the rally en masse.

There are already signs of low conviction in the S&P 500's 14% rally this year, with the index set to end its longest weekly winning streak since 2021. Bank of America Corp.'s latest survey shows a net 25% of global money managers are still underweight US equities, despite a recent improvement in allocation.

Elsewhere, Turkey's lira slumped as the central bank delivered a significantly smaller interest-rate increase than anticipated, as policymakers embark on what they said will be a gradual transition from an era of ultra-cheap money.

WATCH: Fed Chair Jerome Powell said more interest-rate increases may be needed this year. Source: Bloomberg

Key events this week:

Eurozone S&P Global Eurozone Manufacturing PMI, S&P Global Eurozone Services PMI, Friday
US S&P Global Manufacturing PMI, Friday
Fed Bank of St. Louis President James Bullard speaks, Friday

Some of the main moves in markets:

Stocks