ECB economic bulletin, EU flash consumer confidence indicator; UK rate decision; France monthly business survey; no major corporate updates expected
Shares in Europe face a sharp selloff Thursday after declines in U.S. indexes and broad declines in Asian stock benchmarks. Treasury yields mostly rose; the dollar and oil strengthened; while gold fell.
European shares look poised for sharp losses at the open Thursday, tracking moves by U.S. stock indexes overnight after the Fed said it would raise the federal-funds rate by 0.75 percentage point and signaled the need for further increases in the months ahead.
Based on the Fed’s so-called dot plot, investors now expect the central bank to ultimately raise rates above 4% in order to tame inflation.
That is far above what most had anticipated just a few months ago-and likely to keep pressure on markets.
One silver lining for investors was that the Fed didn’t raise rates by a full percentage point, a scenario that an increasing share of traders had feared would play out heading into Wednesday’s meeting.
Still, Fed Chair Jerome Powell’s comments suggested the central bank doesn’t see itself winding down its rate increases anytime soon.
“Inflation is still too high and is coming down too slowly for the Fed and other central banks to take their foot off the gas,” said Altaf Kassam, head of investment strategy for Europe, the Middle East and Africa at State Street Global Advisors. “We are moving, if not permanently then at least in the medium term, into an inflationary environment that will need higher rates for longer.”
“Make no mistake…the Fed wants lower stock prices to get inflation to 2%,” said Bill Zox, portfolio manager for Brandywine Global.
In the U.K., the Bank of England is set for another increase in interest rates on Thursday.
The Fed “didn’t really deliver a lot of surprises” with today’s 75-basis point hike and economic projections, Columbia Threadneedle’s Ed Al-Hussainy said.
Treasury yields shot up right after the policy announcement, as did the DXY dollar index, but they weakened back to pre-Fed levels.
Al-Hussainy expects the Fed to drive the economy into a contraction. “Below-trend growth is stalling out the economy,” to a point where “any incident can send you into a recession,” he said.
The aggressive outlook for monetary policy laid out by Fed Chair Powell Wednesday is already hitting observers’ monetary policy expectations.
Bank of America said it expects bigger rate rises in the future.
“We now expect hikes of 75 basis points in November, 50 basis points in December, followed by two 25 basis points rate hikes by March of next year,” the bank said, adding “our new terminal target range is 4.75-5.0%, up from 4.0-4.25% previously.”
Read: Powell Doesn’t Have to Go Full Volcker for Stocks to Drop
The dollar strengthened in Asia on the prospect of more Fed rate increases.
Overnight, the Fed “hammered home” the need for rates to be higher for longer on top of another large 75-basis-point increase, MUFG Bank said.
Asia ex-Japan currencies are poised to be under pressure today in view of the hawkish Fed, MUFG added.
Treasury yields continued to broadly push higher in Asia, as the yield on the 2-year note climbed further above 4%.
The Fed’s overall message caused investors to increase their forecasts for interest rates over the near term and downgrade them over the longer term.
“There was a whole host of hawkish news heading into this and the Fed came out even more hawkish than the market,” said Zach Griffiths, a senior strategist at the research firm CreditSights, referring specifically to the Fed’s interest-rate projections.
Earlier Wednesday, yields had slipped after Russian President Vladimir Putin had escalated the war in Ukraine by ordering the mobilization of reserve forces and hinting at Russia’s nuclear-weapons capabilities.
The decline, though, was modest, and the Fed’s interest-rate decision quickly took over investors’ attention.
Oil futures rose in Asian trading on a likely technical rebound after prices settled overnight at their lowest in two weeks on Wednesday following data showing that U.S. crude inventories rose for a third consecutive week.
There’s also been a repricing of Russian risk overnight, TD Securities said.
The energy market’s narrative is turning back toward structural tightness as the market reprices war risks with the Northern Hemisphere winter looming on the horizon, added TD.
Read: Why Investors Should Pay Attention to Putin’s Nuclear Saber Rattling
Gold prices declined early Thursday, amid a stronger USD and mostly higher Treasury yields following the Fed decision.
However, gold’s decline may be limited on safe-haven demand, spurred by an escalation in the Russia-Ukraine war after Russian President Putin ordered reservists to mobilize and made remarks perceived as a threat to use nuclear weapons.
Copper prices edged higher, regaining some ground after overnight losses.
Prices may begin to face some pressure after a broad recovery trend in recent weeks, as China’s supply tightness is likely easing, Galaxy Futures said.
This comes as improved weather conditions have helped ports to resume operations, while domestic production is also picking up, the brokerage added.
Iron-ore futures extended gains in China amid supply tightness and higher demand from peak steelmaking seasonality.
But Galaxy Futures analysts advise investors to remain cautious in the near term, as overall commodities trading sentiment is expected to remain muted and a risk-averse approach is likely to prevail after the Fed decision on Wednesday.
Galaxy Futures also flagged longer-term demand weakness amid China’s real estate liquidity crisis.
TODAY’S TOP HEADLINES
Fed Raises Interest Rates by 0.75 Percentage Point for Third Straight Meeting
WASHINGTON-The Federal Reserve approved its third consecutive interest-rate rise of 0.75 percentage point and signaled additional large increases were likely even though they are raising the risk of recession.
Bank of Japan Maintains Ultralow Interest Rates
TOKYO-The Bank of Japan on Thursday kept its ultralow interest rates in place, staying away from a global wave of monetary tightening despite growing inflation.
The decision confirms a further policy divergence between the U.S. and Japan, adding downward pressure on the yen. The yen fell briefly to a fresh 24-year low of more than 145 against the dollar after the BOJ’s announcement. On Wednesday, the Federal Reserve raised interest rates by 0.75 percentage point and signaled additional large increases.
Fed Rate Decision Sends U.S. Treasury Yields in Different Directions
Shorter-term Treasury yields ticked higher while longer-term yields fell Wednesday after the Federal Reserve signaled interest rates will likely climb more this year than many investors had expected.
In a volatile hour of trading, Treasury yields-which rise when bond prices fall-initially climbed broadly after the Fed released its interest-rate forecast. They then fell as Fed Chairman Jerome Powell delivered a more nuanced view of the outlook for interest rates and the economy, emphasizing the Fed’s commitment to fighting inflation but also noting that the pace of future rate increases would depend on incoming economic data.
Escalating Threats From Russia on Ukraine Roil U.N. Meeting
UNITED NATIONS-Russian President Vladimir Putin’s threat of a nuclear response to battlefield losses in Ukraine fueled a new sense of urgency ahead of Thursday’s United Nations Security Council meeting as member states work to diffuse the escalating crisis and question whether the longstanding differences among permanent members have become an impediment to global security.
The U.S. and its allies are working to shore up support among countries to take a stand against Moscow’s…