Bond Market Move Signals Rising Hawkish Fed and US Debt Ceiling Concerns

• Fitch Solutions expects that market volatility will remain elevated in the short term due to a combination of factors weighing on the economic recovery and global markets. The recent sell-off was triggered by (1) Jerome Powell’s (the US Federal Reserve Chairman) warning to US Congress that inflation could remain elevated for longer than initially anticipated, and (2) potential contentious negotiations on Capitol Hill as the US is nearing its debt ceiling. 
• Furthermore, markets had already been weakening on the back of slowing growth momentum, due to the fading of hitherto strong base effects, the waning of credit impulse in several economies (US and China in particular), growth concerns in China and elevated inflation. 
• Slowing growth and rising inflation could be further exacerbated by the current energy crunch. Energy prices, as proxied by natural gas, have soared by around 150% since April and will likely remain elevated as the winter season in the Northern Hemisphere approaches. Rising energy prices could sap consumer and business purchasing power, while power shortages could also result in lost output, adding further pressure on supply bottlenecks.

(Source: Fitch Solutions)