The party will soon be over. On Tuesday, investors accepted that the era of record interest rates was drawing to a close.
And it was only part of a crazy day in the world markets. Massive sales of US stocks accelerated. Consumer confidence has hit an unexpected wall. Oh, and then the US Treasury Secretary said the world’s most powerful economy was about to run out of cash.
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Government bond yields were the main reason the markets stumbled yesterday. When they rise, it indicates that the markets are anticipating interest rate hikes, making borrowing more expensive. The yield on the 10-year US Treasury bill rose 0.05% to 1.539%, the highest since June.
The Federal Reserve already said last week that half of its board expects an interest rate hike in 2022 and on Monday the Bank of England said increases in the UK were also likely. Both central banks have hinted that they will also start cutting back on major stimulus packages.
The potential double whammy of higher borrowing costs and less stimulus is making investors sweat:
- The S&P 500 fell 2% on Tuesday, the biggest one-day drop since May. The tech-focused Nasdaq fell 2.8%.
- The European Stoxx 600 index fell 1.9%, while the technology stocks in the index fell 4.4%.
The dreaded S word: News also fell on Tuesday that the U.S. Consumer Confidence Index fell to a seven-month low at 109.3, suggesting people are wary of spending. This has added to fears of an upcoming “stagflation” – a dreaded economic scenario where inflation is high (it already is) and growth slows.
Hanging from a ceiling: And if all that wasn’t enough, Treasury Secretary Janet Yellen warned on Tuesday that the government will run out of money on October 18 if Congress does not increase the federal debt limit. Historically this has been a bipartisan thing (it has been done 100 times since WWII), but Republicans have been playing tough so far. No sweat, however – Yellen only said that a US default would produce “widespread economic catastrophe.”