Global stocks, bonds hit by hawkish Fed as dollar gains

LONDON/WASHINGTON (Reuters) – World equity markets were heading for their biggest fall in weeks on Thursday and U.S. stocks advanced in choppy trading after the U.S. Federal Reserve signaled it might raise interest rates at a much faster pace than assumed.

FILE PHOTO: People are seen on Wall Street outside the New York Stock Exchange (NYSE) in New York City, U.S., March 19, 2021. REUTERS/Brendan McDermid/File Photo

Bond yields and the dollar rose sharply on the surprise move. The greenback touched a two-month high and 10-year U.S. Treasury yields – a key driver of global borrowing costs – consolidated their biggest rise since early March.

Europe’s STOXX 600 looked set to snap a nine-day winning streak – its longest since 2017 – with a 0.2% dip. Tokyo had closed down nearly 1%.

The Dow Jones Industrial Average was down 0.31% and the S&P 500 was down 0.04% by 10:02 a.m. EDT (1402 GMT) and the Nasdaq Composite edged up 0.3%.

An unexpected increase in U.S. jobless claims briefly lifted bullion prices off the session’s steepest losses, before spot gold sank over 2%.

“The headache from the post-Fed hangover remains in effect this morning,” Bespoke Investment Group’s Paul Hickey said in a note.

“With the FOMC apparently taking a bit of a more hawkish turn, look for good economic data to start having a negative impact on equity prices,” he said, using the acronym for the Federal Open Market Committee.

Increasingly confident in the U.S. economic recovery, the Fed is seen most likely launching its tapering of its $120 billion-a-month asset purchase program in January, according to a Reuters poll.

The Fed on Wednesday also signaled it would now be considering whether to taper those purchases meeting by meeting, and downgraded the risk from the pandemic given progress with vaccinations.

JPMorgan analysts noted Fed Chair Jerome Powell had not been as aggressive in his news conference. He had described it as a “talking about talking about meeting,” a reference to his protestations earlier this year that the Fed was not even “talking about talking about” tighter policy.

“It appears that faster progress toward reopening and higher inflation surprises revealed some hawks on the FOMC, but we suspect that leadership is predominantly anchored at zero or one hike in 2023,” JPMorgan said, sticking with a prediction for tapering to start early next year.

Markets moved quickly to price in the risk of earlier action and Fed fund futures shifted to imply a first hike by the end of 2022. Yields on 10-year bonds rose from less than 1.49% to as high as 1.594%.

Bond giant Pimco’s U.S. economists said the tapering plan might now be announced as soon September, and that it would take roughly six to nine months to wind down the stimulus.

“The more hawkish changes to FOMC participants’ rate path expectations came despite little change in the 2023 unemployment rate and inflation forecasts,” Pimco said, “This suggests less tolerance for an inflation overshoot than previously thought.”

A sooner rate hike

ALL RISE

The dollar broke out of recent tight ranges. It extended Wednesday’s 0.9% increase a basket of currencies to set a two-month high at 91.849. [/FRX]

Powell’s hawkish turn prompted both Goldman Sachs and Deutsche Bank to abandon their calls that the U.S. currency would weaken against the euro, although others were not so sure.

Agnès Belaisch, chief European strategist of the Barings Investment Institute, said the fact that the Fed was not going to lift rates anytime soon was good for world growth and that FX markets would therefore get over Wednesday’s shift.

“He (Powell) said they wouldn’t do anything for the next two years, so it’s a shock but wrapped in good news,” Belaisch said. “I think he gave the markets the all-clear to rally.”

Hans Peterson, global head of asset allocation at SEB investment management, added: “In the small print it is interesting that they have moved rate hikes closer, but they are still far, far away.”

“I think it confirms our bullish view of the world.”

The euro slipped to $1.19206 from just over $1.20 in the Asian session and the dollar was just shy of its 2021 high against the yen, last buying 110.42 yen.

Turkey’s central bank kept its interest rates at 19%, but seemed to be inching toward a cut, which kept the lira on edge.

Norway’s central bank said it was likely to hike its zero percent interest rates in September, but it didn’t stop the crown from falling.

Oil prices were insulated by the prospect of stronger world demand and still tight supply, with Brent reaching its highest since April 2019 before running into profit taking and headwinds from the sharply higher dollar. [O/R]

Brent was last off 0.5% at $74.05 a barrel, while U.S. crude eased 0.3% to $71.91.

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