Rates Fall as Equities Have Worst Day in Eleven-Months

Rates drop, equities decline in broad risk-off move. Swap rates and Treasury yields declined sharply as markets sized up the contagion risk from the potential default of Chinese developer Evergrande, and six separate central banks prepared to make policy rate decisions. Few, if any central banks are expected to make changes to their policy rates, but the packed calendar raises the stakes for bond and equity markets alike. The 10-year Treasury yield declined 5 bps to close at 1.31% while the S&P 500 endured its worst day since October 2020- dropping 1.7%.

The Fed gets support on its transitory inflation thesis. The Bank of International Settlements (BIS) released a report that claimed the recent rise in global inflation should be short lived. The BIS research commented that recent increases in headline inflation can be due “to price swings in finely defined expenditure categories rather than generalized price movements.” The stickiness of the recent rise in global prices has been hotly debated, with both the Fed and the ECB staying firm on their transitory inflation argument. The Fed’s September FOMC meeting starts this Wednesday, with investors waiting for any policy updates on the Fed’s $120 billion bond buying program.

U.S. home builder sentiment increased for the first time in five months in September. The National Association of Homebuilders (NAHB) report’s increasing sentiment was primarily attributed to lower material prices, most notably falling lumber prices. Further, home builders are still enjoying historical demand from buyers. Home builders continued to be challenged in filling job vacancies.