(Bloomberg) – Stocks and bonds fell as Jerome Powell’s warning that the US Federal Reserve would hike interest rates more than previously expected dampened risk appetite. The dollar won.
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Futures on the S&P 500 fell 0.7% after falling 2.5% on Wednesday. The sell-off spread to Europe and Asia, where China’s reaffirmation of its Covid-zero stance dashed hopes of a reopening. Moderna Inc., Qualcomm Inc. and Roku Inc. declined in premarket trading, while Etsy Inc. and eBay Inc. rose.
The Fed’s 75bps hike is likely to be followed by a similarly large hike from the Bank of England later on Thursday, although rates there may be capped by the risk of a deep recession. Powell disappointed traders on a pivot as the US economy remains resilient to stubbornly high inflation.
“Anytime the market gets a little cautious hope, it gets hit in the face with a rolled-up newspaper,” said Scott Rundell, chief investment officer at Mutual Ltd. “There’s still a lot of volatility ahead.”
Investors are concerned about the impact of central bank tightening on economic growth, and Powell left little doubt that he is prepared to push interest rates as high as necessary to stamp out inflation. European Central Bank President Christine Lagarde warned Thursday that a “mild recession” was possible but would not be enough to stem rising prices.
The dollar strengthened as investors eyed US jobs data, which could help set the pace of forthcoming rate hikes. The pound fell more than 1% as concerns mounted that a less-than-expected increase in the BOE could amplify sterling’s decline, while the Norwegian krone fell after the central bank made the smallest hike in interest rates since June.
The story goes on
“After the big moves following the FOMC meeting outcome and Powell’s press conference, there is likely to be some profit-taking on long-dollar positions,” said David Forrester, a senior FX strategist at Credit Agricole CIB in Hong Kong.
Global bonds tumbled Thursday amid the Fed meeting. Two-year Treasury bond yields rose to 4.71%, but they’re still below the 5.06% peak of yields priced into Fed fund futures.
“Given credit market sentiment, markets are increasingly convinced that the path to the final interest rate will include a recession,” said Quincy Krosby, LPL Financial’s chief global strategist.
Wheat prices fell after Russia agreed to resume a deal allowing safe passage of Ukrainian grain exports. Oil fell after Powell’s comments on interest rates overshadowed supply tightening.
Important events this week:
Bank of England rate decision, Thursday
US Factory Orders, Durables, Trade, Initial Jobless Claims, ISM Services Index, Thursday
US nonfarm payrolls, unemployment, Friday
Some of the key movements in the markets:
Stocks
Futures on the S&P 500 were down 0.7% as of 7:15 a.m. New York time
Futures on the Nasdaq 100 fell 0.9%
Futures on the Dow Jones Industrial Average fell 0.5%
The Stoxx Europe 600 fell 1.2%
The MSCI World Index fell 1.6%
currencies
The Bloomberg Dollar Spot Index rose 0.6%
The euro fell 0.8% to $0.9744
The British pound fell 1.1% to $1.1261
The Japanese yen fell 0.2% to 148.21 per dollar
cryptocurrencies
Bitcoin rose 0.4% to $20,249.94
Ether is up 2% to $1,541.44
Bind
The 10-year government bond yield rose 9 basis points to 4.19%
The 10-year German government bond yield rose 10 basis points to 2.24%
The 10-year UK government bond yield rose 6 basis points to 3.46%
raw materials
West Texas Intermediate Crude fell 1.5% to $88.64 a barrel
Gold futures fell 1.6% to $1,623.70 an ounce
–Assisted by Richard Henderson.
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