Shares Rally And Treasury Yields Decline As US Economy Shrinks

On Thursday, US stock indexes rallied, while Treasury yields declined for the third consecutive day, as investors were weighing data showing a decline in the US economy for the second quarter in a row, a day after the US Federal Reserve hiked the interest rate.

Dollar movements and data

Along with Treasury yields declining, the dollar also dropped against the Japanese yen to a six-week low, after the release of the economic data.

The disappointing data fanned speculation that the US Federal Reserve would cut back on its aggressiveness in terms of interest rate hikes going forward.

The advance estimate of the Commerce Department showed that there would be a 0.9% drop in the US gross domestic product (GDP) data for the second quarter.

Economists had expected the number to grow by 0.5%, after there had already been a contraction in the first quarter by 1.6%.

The data came after the US Fed committed on Wednesday to not back down from its battle against inflation, which has reached the highest since the 1980s.

The Fed said that they would continue their fight, even if it means a ‘sustained period’ of a slowing jobs market and economic weakness.

Equities rally

There had also been a rally in Wall Street stocks on Wednesday, as comments from Jerome Powell, the Fed chairman, saw higher bets of a slowdown in rate hikes soon and rate cuts next year.

US equities kicked off the day a bit weaker, but they entered into positive territory within an hour of trading and continued to take off.

There was a 1.03% rise in the Dow Jones Industrial Average, which rose by 332.04 points to reach 32,529.63 points.

A 1.21% gain in the S&P 500 saw it climb by 48.82 points to reach 4,072.43 and a 1.03% gain in the Nasdaq Composite took it higher by 130.17 points to reach 12,162.59 points.

There was a 1.24% gain in the MSCI gauge of global stocks. The continent-wide STOXX 600 index also gained 1.07%, even though Europe is facing an energy crisis and a possible recession.

Treasury yields and currencies

Market analysts said that a fall in Treasury yields indicated that people were betting on a more gradual pace of hiking in the interest rates moving forward.

In addition, it was also worth noting that GDP had declined at a time when there hadn’t been that much of a hike by the US Federal Reserve.

Analysts said that the balance was going to be an interesting one between a moderation in inflation and an economic backdrop that appears to be more challenging.

A prolonged and deep recession does not seem likely, especially if the expected slowdown becomes evident in the next couple of quarters.

Bond markets had seen 2-year Treasury yields record declines of 3% on Wednesday and they declined further on Thursday.

There was a further narrowing in the spreads between 2-year and 10-year Treasury yields. It is considered a sign of recession when the former is higher than the latter.

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