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Could This be the End to Monetary Tightening?

Miguel A. Rodriguez
Miguel A. Rodriguez
03 November 2023

With the US Federal Reserve (Fed) and other central banks leaving interest rates stable, markets are betting that the end of monetary tightening is here. Today, focus will turn to Non-Farm Payroll. 

Bets on end of rate hike bring rise to the global equity markets

Yesterday saw another rise in the global equity markets along with an increase in government bond yields as investors bet that interest rate hikes by central banks have ended. On Wednesday the Fed left interest rates unchanged and the Bank of England followed the same pattern yesterday. After these events and the comments made by the central banks, the consensus among analysts and investors leans towards the end of monetary tightening.

Powell said monetary policy is at a “restrictive” level

Although the highly anticipated speech by Fed chief, Jerome Powell, left the door open to possible further rate hikes, it also showed his uncertainty about how the economy could develop. This uncertainty stems from the fact that the market has recently been driven by Treasury yields and this could have an impact on the economy. He added that the Fed will only "proceed carefully" and that monetary policy is currently at a "restrictive" level.

The market feared recent strong economic data, especially last week's sharp rise in gross domestic product, would push Powell to take a tougher stance. After this did not happen, it seems that central bankers feel more comfortable with current levels of inflation and interest rates.

Treasury bond yields continue to fall

Yesterday, Treasury bond yields continued to decline with the 10-year bond at 4.66%. This scenario is now the main fundamental factor influencing the performance of the market that is benefiting from the relaxation of financing conditions.

As a result, the North American indices rose with some gaining more than 1%, such as the S&P500, which is technically reversing the trend of the last bearish section. 

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USA500 monthly chart, November 3, 2023. Source: WebTrader.

Non-farm payrolls will be out today

Today the always relevant data on Non-Farm Payrolls will be published. If the data shows a cooling of the labour market, this could reinforce the general market opinion that the end of interest rate hikes has been met. This may also contribute to a continuation of the improvement in investors' positive risk sentiment.

Key Takeaways

  • Government bond yields rose on bets that banks have reached the end of interest rate hikes.
  • Powell said the economy could be impacted by Treasury yields which are currently driving the market.
  • Yesterday Treasury bond yields continued to decline.
  • Indices saw another day of gains, with some rising more than 1%.
  • Markets will be waiting for the release of the non-farm payrolls today.
  • A looser labour market could help investors become more positive.

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Sources: Bloomberg, Reuters 







Miguel A. Rodriguez
Miguel A. Rodriguez

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.