Shares rally as bond market lights up with recession risk

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Buying action in the US bond market suggests aggressive interest rates from the Federal Reserve now will mean cuts later. Regional markets rallied on Wall Street’s heels.

Australian shares rallied on the heels of Wall Street as the bond market dramatically rethinks how high central banks will have to raise rates amid rising fears of a recession that could slow the pace of monetary tightening.

US rates are then expected to fall back to 2.3 per cent by the end of 2024, compared to 3 per cent as of two weeks ago. The SChris Rands, co-portfolio manager of the Yarra Australian bond fund, said the bond market rally shows it is starting to question whether aggressive Fed rate increases are going to occur.

NAB senior FX strategist Rodrigo Catril said what really caught the bond market’s eye on Friday was a heavy decline in the new orders sub-index from the manufacturing survey, which contracted for the first time in two years.“This tends to be a good leading indicator and exacerbated the view that the US economy is slowing very quickly,” he said.

Mr Catril similarly referenced the volatility in the bond market, saying “the market is really not sure how things are going play out”.“We still don’t know what inflation is going to do, and for the Fed, it’s all about inflation. So, in terms of markets pricing that almost perfect outcome in 2023, we think that’s looking a little bit questionable,” he said. “We think the pricing will swing both ways as the data comes through with different messages.

He expects a further 125 basis points of increases this year, taking the Fed funds rate to 3 per cent. However, more inflation data is needed.

 

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