Global stocks experienced a rally on Tuesday, with bond yields inching higher as traders anticipate that interest rates will soon peak. The market expects the Federal Reserve to further tighten monetary policy in May to address inflation concerns. Gold prices climbed above the $2,000 level, while oil prices rose despite Chinese inflation data suggesting weak demand.
Bond markets appear to be anticipating a pause in interest rate hikes, with the two-year Treasury yield rising 3.5 basis points to 4.043%. Futures indicate a 67.2% likelihood that the Fed will raise rates by 25 basis points to a range of 5.0%-5.25% after their May meeting.
However, markets are pricing the Fed to cut its target rate to 4.392% by December as the economy slows and potentially enters a recession. “The Fed could surprise us and pause” in May, said Tim Ghriskey, chief investment strategist at Inverness Counsel in New York. “But they’re very unlikely to roll over at this point. They are determined to crush inflation.”
Investor sentiment has been bolstered by signs that turmoil in the banking sector is easing. Deposits at U.S. commercial banks rose near the end of March for the first time in about a month, following the two largest bank failures since the financial crisis.
The International Monetary Fund (IMF) trimmed its 2023 global growth outlook slightly due to higher interest rates cooling economic activity. However, the IMF’s latest World Economic Outlook suggests that current high rates “are likely to be temporary” and predicted that, once inflation is under control, rates in advanced economies would return to pre-pandemic levels.