There’s a subtle shift taking place in some corners of the financial market toward the view that the U.S. economy may be strong enough to handle higher interest rates that can help bring down inflation.Signs of that sentiment shift were evident in Treasurys, where yields stayed substantially higher across the board on Wednesday, led by 3- to 7-year rates. Meanwhile, fed funds traders flipped back and forth between expectations for a 75- basis-point and a 50-basis-point rate hike in September, while 5-, 10- and 30-year inflation-adjusted yields all trended higher in morning trading. Sentiment has wavered over the past week between optimism that inflation is fading — as expressed by U.S. stock indexes that remain well off their mid-June lows — and pessimism that the Federal Reserve’s hikes to combat inflation will produce an economic downturn, as reflected in a deeply inverted Treasury curve. Though July’s consumer-price index report pointed to drivers of inflation “showing some relief,” a still-strong U.S. economy is now keeping alive the risk of a couple more 75 basis point rate hikes by the Fed, said Ed Moya, senior market analyst for the Americas at OANDA Corp.July’s better-than-expected improvement in the CPI data gave many hope that inflation could be peaking, while buttressing the more dour view in FX and rates markets that persistently tight policy by the Fed is needed to bring price gains down. The subtle shift in thinking that’s now taking place is that the economy may be stronger than previously thought, …
