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A look at the day ahead in U.S. and global markets

By Mike Dolan, Editor-At-Large, Financial Industry and Financial Markets

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World markets wobbled on Tuesday, with benchmark bond yields and volatility gauges jumping to their highest in almost four weeks, as more evidence of the stoic U.S. consumer alongside runaway tech stocks leaves the Federal Reserve with a conundrum.

Also agitated by Tuesday’s whopping $297 billion sale of Treasury notes and bills and a tepid investor response, 10-year benchmark yields hit their highest level since May 3. The VIX also jumped to near four week highs and the dollar firmed, especially on the yuan and euro.

People carry shopping bags along 5th Avenue during the holiday season in New York City, U.S., December 9, 2022. REUTERS/Eduardo Munoz

The rates market angst began with the latest readout on resilient U.S. households however. Confounding expectations of a slowdown this month, the Conference Board’s monthly survey showed consumer confidence pushed higher again in May.

Even though the survey revealed some anxiety about possible recession ahead, the surprising optimism centred on two main things. The first is plentiful jobs, as the unemployment rate has now stayed below 4% for 26 consecutive months, and rising stock markets.

The survey’s net reading of those who expect stock prices to keep rising over the next 12 months over those who see it falling is at its highest since 2018 – and may well be flattering the view of household finances and spending plans.

And that tallies with Chicago Fed’s national financial conditions index at its loosest setting since late 2021 – four months before the Fed starting tightening policy in March 2022.

Although futures have dialled back about half a percent before Wednesday’s open, the S&P500 is some 10% above the pre-Fed tightening peaks.

And led by another 6% surge on Tuesday in artificial intelligence torchbearer Nvidia, the Nasdaq crossed 17,000 for the first time ever.

Nvidia’s latest leap put the AI chipmaker’s market value at $2.8 trillion – leaving the world’s third biggest company just $100 billion shy of Apple.

The question for the Fed in all of this is whether the rising stock market is undermining its credit market tightening, despite benchmark borrowing and long-term mortgage rates being at their highest in a decade.

If consumers feel their finances are rising anyway, it may struggle to get inflation back into its 2% box.

Higher oil prices ahead of the weekend OPEC meeting won’t help.