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US inflation expectations, as measured by the 10-year breakeven inflation rate according to the St. Louis Federal Reserve data, rose for the second consecutive day to 2.38% by the end of Monday’s North American session.
The inflation gauge extends rebound from a four-month low flashed last week ahead of the key Federal Open Market Committee (FOMC) meeting, scheduled for Wednesday.
Given the escalating chatters over hawkish halt by the Fed during this week’s appearance, increasing inflation expectations can help the policymakers to prove right the market expectations, which in turn could propel yields and the US dollar.
In addition to the Fed meeting, US PCE Inflation data and the Q4 Advance GDP also gains major attention for the future actions of the US central bank.
Cracks are beginning to appear in some risk assets on concerns around Fed tightening. The S&P500 has corrected 7.7% and Nasdaq has dropped 12% YTD. Tech-heavy Nasdaq had benefitted from low US yields. They are now coming under pressure with US yields inching higher. Stocks that had benefitted from the ‘Stay at Home’ theme are also now coming under pressure.
On Friday the global risk sentiment had been marred by US-Russia geopolitical tensions around Ukraine. Despite a drop in US yields, equities still underperformed with S&P500 losing another 1.9%. From a high of 1.90% seen on 19th Jan, the US 10y yield dropped to a low of 1.73% on Friday.
It has recovered today in the Asia session to 1.77%. Brent too which had dropped on higher-than-expected build-up in US inventories has recovered to get back to the highest level in 7 years at USD 88.5 per barrel.
