LONDON (Reuters) – World equities were heading for their biggest fall in weeks on Thursday after the U.S. Federal Reserve startled investors by signalling it might raise interest rates at a much faster pace than assumed, sending bond yields and the dollar sharply higher.
The dollar scored a 2-month high hot on the heels of its strongest rise in 15 months, Wall Street looked set for a bumpy restart [.N] 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 0.3% dip. Tokyo had closed down nearly 1%, while Wall Street futures pointed to a modest 0.4% drop. [.N]
The Fed forecasts showed 13 of the 18 person policy board saw rates rising in 2023 versus only six previously, while seven tipped a first move in 2022.
“The most hawkish development was the dot plot now showing the 2023 median dot pricing in 2 rate hikes, compared to 0 hikes last meeting,” said Deutsche Bank macro strategist Jim Reid.
While these “dot plots” are not commitments and have a poor track record of predicting rates, the sudden shift was a shock.
The Fed also signalled it would now be considering whether to taper its $120 billion-a-month asset purchase programme 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 media 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 shot up almost nine basis points overnight to as high as 1.57%.
Bond giant Pimco’s U.S. economists said the tapering plan might now be announced as soon September, and that it would take roughly 6-9 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.”
(GRAPHIC: A sooner rate hike – )
ALL RISE
The dollar also broke out of recent tight ranges. It had risen 0.9% on Wednesday against a basket of currencies for its biggest gain since March last year and added another 0.7% in Europe to set a two-month high at 91.819. [/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 any time 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 back towards $1.1930 from just over $1.20 in the Asian session and the dollar was just shy of its 2021 high against the yen, last buying 110.72 yen.
The kiwi dollar clawed back about half of its overnight losses after New Zealand’s first-quarter growth figures blew past forecasts, while the Aussie dollar and British pound weakened along with emerging market currencies. [AUD/]
Also for currency markets, Turkey’s central bank kept its interest rates at 19%, but seemed to be inching towards 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.
Elsewhere, the rise in bond yields and the dollar were a double blow for non-yielding gold, which was down at $1,810 an ounce after sliding 2.5% overnight.
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 0.3% at $74.15 a barrel, while U.S. crude lost 0.2% to trade at $71.98.
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