Trading Day: Yields squeeze stocks

By Jamie McGeever

ORLANDO, Florida, May 18 (Reuters) – Stocks mostly retreated on Monday as a deepening global bond rout drove yields to historic highs, darkening the economic outlook and casting a shadow over the AI rally ahead of Nvidia’s quarterly earnings report later in the week.

In my column today, I look at an acute problem suddenly facing the Fed and other G4 central banks as inflation takes off: negative real interest rates. They are highly stimulative, the last thing policymakers need right now.

If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.

1. Global bond rout deepens as Iran war drags on and underscores inflation fears

2. A new day at the Fed, but policy forecast cloudy for Warsh, Trump, US

3. G7 finance chiefs seek to tackle imbalances in wake of bond selloff

4. Citi partners with BlackRock’s HPS for $17.5 billion private credit program

5. Samsung Electronics and union extend talks to avert strike threatening global supply chains

Today’s Key Market Moves

• STOCKS: Japan -1%, Australia -1.5%; UK +1%, Europe +0.5%. S&P 500 and Nasdaq in the red, Dow +0.3%.

• SECTORS/SHARES: Four S&P 500 sectors fall, seven rise. Tech -1%, energy +1.8%. Philly semiconductor index -2.5%, Micron Technology -6%, Nvidia -1.3%. Dominion Energy +9.5%, 3M +4%.

• FX: Dollar index hits 6-week high then closes lower for the first time in six days. Sterling biggest G10 gainer. Bitcoin down for fourth day.

• BONDS: Long bonds tumble – 30-year JGB yield highest ever, 30-year Bund yield highest since 2011, 30-year UK gilt yield hits highest since 1998. Treasuries close relatively flat.

• COMMODITIES/METALS: Oil rises, gold +0.5%.

Today’s Talking Points

* Bond alarm rings louder

U.S. and many other developed economy bond yields closed lower on Monday, but not before leaping to fresh historic highs as investors served policymakers with another reminder of how they view the inflation outlook. And it isn’t pretty.

At the short end, rate hike expectations are intensifying, and further out the curve long bond yields are the highest in decades as inflation expectations risk becoming unanchored. Japan’s long bond yields have never been higher. The mix of energy shock, supply constraints and fiscal worries is taking its toll. Can central bankers get the genie back in the bottle?

* China’s domestic issues

China’s economic data dump for April was a “particularly concerning reality check,” according to Barclays. Retail sales, industrial production and demand for loans were all softer than expected, putting Asia’s largest economy on a weak footing at the start of the second quarter.

Barclays economists note three particular areas of concern: slowing industrial production, despite strong export growth; the sharp deterioration in household consumption; intensifying household deleveraging, resulting in the largest net loan repayments on record. All point to weak domestic demand.

* Counting the cost

Unless a permanent resolution is reached within the next 10 days, the Iran war will soon enter its fourth month. The hit to companies has been felt most in soaring oil and energy prices, but the impact goes deeper and wider.

A Reuters review of 279 corporate statements across the U.S., Europe and Asia finds that companies’ bill has already reached at least $25 billion – and it is rising. To put that in context, hundreds of companies by last October had flagged more than $35 billion in costs from President Donald Trump’s 2025 tariffs. Add in surging bond yields, and corporate profitability is coming under pressure.

What could move markets tomorrow?

• Developments in the Middle East

• Australia consumer sentiment (May)

• Japan GDP (Q1, prelim)

• European Central Bank’s Philip Lane and Claudia Buch speak

• Euro zone trade (March)

• UK unemployment (March)

• Bank of England Deputy Governor for Financial Stability Sarah Breeden speaks

• Canada inflation (April)

• U.S. Federal Reserve officials scheduled to speak include Governor Christopher Waller, Philadelphia Fed President Anna Paulson, Atlanta Fed interim President Cheryl Venable

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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

(Reporting by Jamie McGeever;)