The initial market jolt from the weekend attacks on Israel seemed to dissipate quickly as a modest pop in oil prices levelled off far below recent highs. U.S. crude hovered just above $86 per barrel on Tuesday, still off almost 10% from the peaks of late September and down 5% year-on-year.
As cash Treasury markets returned from Monday’s Columbus Day holiday to a week of heavy long-term debt auctions, they were also greeted with rekindled optimism about the Federal Reserve’s policy rate trajectory.
Specifically, the typically hawkish Dallas Fed boss Lorie Logan suggested the recent tightening in bond markets may have done the Fed’s work for it and lessened the need for another policy rate hike. Fed futures tend to agree and now see only about a one-in-four chance of further rate rise.
“If long-term interest rates remain elevated because of higher term premiums, there may be less need to raise the fed funds rate,” said Logan, referring to creeping risk premia on holding long-term Treasury bonds.
Fed Vice Chair Philip Jefferson chimed: “I will remain cognizant of the tightening in financial conditions through higher bond yields and will keep that in mind as I assess the future path of policy”.
Ten-year U.S. Treasury yields are set to kick off Tuesday’s U.S. trading day at some 4.65% – almost a quarter of a percentage point below the peak set just after Friday’s blowout September jobs report.
It was that exceptional U.S. economic strength the International Monetary Fund spotlighted in its latest World Economic Outlook, released at the annual meetings of the IMF and World Bank in Marrakesh on Tuesday.
While the IMF cut its growth forecast for China and the euro area, it left its overall global forecast unchanged due to what it called the “remarkable strength” of the U.S. economy.
The Fund upgraded both its 2023 and 2024 U.S. growth forecasts by 0.3% and 0.5% respectively to 2.1% and 1.5% clips.
