Originally published by Rivkin Securities
There is no doubt that volatility has returned to US stock markets with the Dow Jones Industrial Average trading up approximately 1.5% early in the day but eventually closing flat. Much of the decline came in the last 15 minutes of trading with a sudden sharp decline going into the close. The S&P 500 also had a late decline that took this index to loss of 0.5% at the close.
Bond prices have been exceptionally volatile over the past couple of days. During the height of Monday’s stock rout, the yield on the US 10-year bond dropped from 2.87% to 2.65% in just a few hours but this decline has now been largely reversed with the yield currently sitting at 2.83%. Part of the rally in yields overnight was caused by a weak auction of new 10-year bonds as well as the announcement that the US senate has reached a deal that would continue funding the government for the next two years. Part of this deal includes a suspension of the debt ceiling and increased spending which is likely to increase bond issuance (i.e. supply) by the government. Australian bond yields have had a similarly wild ride and the 10-year yield is currently just above the US yield at 2.86%.
The market implied probability of the number of rate hikes to expect this year has varied significantly over the last couple of days. The probability of a rate hike at the March FOMC meeting is now 72% according to the CME FedWatch Tool.
The Reserve Bank of Australia left rates unchanged on Tuesday. Although the board acknowledged that GDP growth is expected to pick up to above 3%, there is still concern over household spending and debt levels. Inflation also remains low, just below the 2% target, which gives the board the confidence to keep rates low for now. The retail sales and trade balance data that was released on Tuesday were both below expectations.
Data Releases:
- China Trade Balance 12:00pm AEDT
- UK Interest Rate Decision 11:00pm AEDT