Daily Market Color

Rates Rise as Oil Hits 7-year High

Equities decline, rates tick higher as oil prices hit highest levels in seven years US crude prices hit seven year highs after OPEC and its allies declined to increase crude production, sticking to their plan to only gradually increase oil supply despite a significant uptick in demand. Crude oil hit $78/barrel in response to the announcement while US equities dropped – the S&P 500 and Nasdaq declining 1.30% and 2.14% respectively. The 10-year Treasury yield rose to near 1.50% while 10-year breakeven inflation rates rose to 2.39%.

The U.S. Treasury bill market has started to price in debt-limit concerns. Recent forecasts by the Congressional Budget Office and Treasury Secretary Yellen have estimated that the U.S. may be unable to pay its bills by as soon as October 18th, with estimates going out to the middle of November. The yields on U.S. Treasury bills around this “default window” have spiked in recent days.

St. Louis Fed President Bullard warns of sticky inflation in 2022. Bullard commented today that U.S. businesses within his district are not having any issues in passing through costs to their customers, showing concern that inflation could remain elevated into 2022. The St. Lous Fed has increased its inflation target to 2.8% for 2022, well above the Fed’s 2.0% target. Bullard has supported more aggressive action in combating inflation and sees two rate hikes in 2022.

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