US Treasury yields, hawkish Fed bets rally on Powell’s tough stance

  • Markets turn risk-aversion after Fed Chair Jerome Powell appeared hawkish at Jackson Hole.
  • Fears of recession add strength to sour sentiment and underpin US Treasury yields, DXY.
  • Traders price in 75% chances of 0.75% Fed rate hike in September, US 2-year Treasury yields refresh 15-year high.

The post-Jackson Hole pessimism continues to propel the US Treasury yields and hawkish Fed bets during early Monday morning in Europe. The risk-aversion wave also took clues from fears of recession surrounding the UK and Eurozone.

That said, the US two-year Treasury yields rise to the highest since 2007, up 2.5% intraday near 3.487% at the latest, whereas the 10-year benchmark adds nearly 10 basis points to 3.129%. Also, market pricing now indicates a 74.5% chance the Fed will hike rates by 75 basis points at its September meeting, per BOE’s FED WATCH tool. It’s worth noting that the US Dollar Index (DXY) also cheers the hawkish Fed bets and firmer yields to rise to the fresh high since September 2002, up 0.50% near 109.45 at the latest.

Federal Reserve following Chair Jerome Powell's hawkish speech on Friday turned down the market’s hopes of witnessing cautious remarks from Powell, considering the latest challenges to the economic slowdown. Also fueling the US Treasury yields could be the comments from US Senator Elizabeth Warren said on Sunday, per Reuters, that she was very worried that the Federal Reserve was going to tip the US economy into recession.

Additionally, a study presented at the Jackson Hole Symposium stated that the central banks will fail to control inflation and could even push price growth higher unless governments start playing their part with more prudent budget policies. "If the monetary tightening is not supported by the expectation of appropriate fiscal adjustments, the deterioration of fiscal imbalances leads to even higher inflationary pressure," said Francesco Bianchi of Johns Hopkins University and Leonardo Melosi of the Chicago Fed.

Elsewhere, the energy crisis in the UK and Europe join the Sino-American tussles, recently over Taiwan, to underpin the risk-off mood and fuel the US dollar. While portraying the mood, the S&P 500 Futures drop 0.80% intraday while tracing Friday’s downbeat Wall Street performance.

Moving on, market players could witness further US dollar strength amid hawkish Fed bets, which in turn could weigh on the prices of gold and currency majors. However, Friday’s US jobs report will be crucial for clear directions.

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