U.S. stocks and government bonds started the new month on an upbeat note as weaker-than-expected manufacturing data prompted investors to reassess how much the Federal Reserve will raise interest rates.
The S&P 500 stock gauge rose 1.8% in early afternoon New York, after closing down 1.5% on Friday. The decline had capped a third consecutive quarter of losses for the broad index, as stock markets slumped under strain from central banks, led by the Fed, turning the screw on monetary policy.
The tech-heavy Nasdaq Composite rose 1.4% after similarly wrapping up its longest streak of quarterly declines since the 2008 financial crisis.
“A rapid tightening of monetary conditions in the United States – the rise in borrowing rates and the dollar – has been conducive to creating financial stress in the past and is now becoming a key vulnerability,” said Bruce Kasman, economist in chief at JPMorgan Chase, adding that “recent weeks have shown a substantial increase in overall volatility and increased stress in the credit market.”
Monday’s more upbeat moves came as new data showed U.S. manufacturing activity growth came in below expectations last month, with an ISM index registering a reading of 50.9 for September – the lowest since May 2020.
Economists polled by Reuters had expected a figure of 52.2, down from 52.8 in August. Any number above 50 indicates expansion.
Concerns have intensified this year that the Fed and other central banks will raise borrowing costs so far and so rapidly in their efforts to rein in inflation that they are worsening a global economic slowdown.
Investors have been watching data releases closely in recent months for clues about the future path of monetary policy, with signs of slowing growth dampening estimates of how aggressively policymakers fixing rates will turn the screw.
On Monday, markets were pricing U.S. interest rates to rise to just under 4.4% by March 2023, down from expectations of around 4.7% 10 days ago. The Fed’s current target range is between 3% and 3.25% after three consecutive increases of 0.75 percentage points.
US government bonds rallied sharply on the first trading day last quarter, with the yield on the benchmark 10-year Treasury slipping 0.18 percentage points as its price rose. The two-year yield, which is more sensitive to changes in interest rate expectations, fell 0.13 percentage point to 4.08%.
Yields on ten-year gilts also fell on Monday after British Prime Minister Liz Truss’ government scrapped plans to cut taxes on high earners in the UK.
The rally in gilt prices followed days of historic swings triggered by Westminster’s “mini” budget unveiled on September 23. At the time, Chancellor Kwasi Kwarteng presented a plan involving £45billion in unfunded tax cuts, which would largely be met by issuing government bonds.
At the start of last week, the yield on the 30-year gilt jumped 0.75 percentage points as its price crashed – a sell-off that ultimately led the Bank of England to intervene on Wednesday, pledging to buy back long-term government debt to stabilize the market.
The pound also rose after the Westminster U-turn, rising 1% against the dollar to $1.127 after falling last week to its lowest level on record.
Still, analysts remain unconvinced that the pound would rally much further. “The [U-turn] is rather symbolic, being less about the amount of money it will save. . . and more about the wrong signal he sent of ideological (unfunded) tax cuts,” according to ING strategists.
“It would be difficult to claim that [the pound] should trade much higher than that [against the dollar].”
In commodities, benchmark Brent crude added more than 3% to around $88 a barrel, helped by news that international alliance Opec+ was planning a substantial production cut. Those gains in turn propelled energy stocks higher on Monday.
The regional Stoxx 600 equity gauge in Europe ended the day up 0.8%.