- European stocks rose 0.45%, and US Standard & Poor’s index futures were flat
- The US yield curve has been more inverted since 1981
- Brent crude hits its lowest level in 4 weeks
LONDON/SYDNEY (Reuters) – Global stocks were heading for a 1% loss for the week on Friday, pulling back from two-month highs after US Federal Reserve officials fired more warning shots about interest rates, while US bond yields curved. Priced for recession.
Dollar and bond yields rose after St. Louis Federal Reserve Bank President James Bullard said interest rates may need to reach a range of 5-5.25% from the current level of just under 4.00% in order to be “constrained enough” to rein in inflation.
That was a blow to investors who had been betting on interest rates would peak at 5% and saw Fed fund futures sell off as markets priced in more chance that rates are now higher at 5-5.25%, instead of 4.75-5.0%.
“The Fed went back through their rhetoric and defended market narratives — we’re not going to see a pivot,” said Arun Say, chief multi-asset strategist at Pictet Asset Management.
The market is currently “running with fumes,” Say said and will shift focus to the real economy’s response to higher rates, such as signs of a slowdown in the US labor market.
MSCI World Equity Index (.MIWD00000PUS) rose 0.17% while US S&P futures were flat after the S&P 500 (.SPX) fell 0.3% on Thursday.
European stocks (.STOXX) rose 0.54%, with banks (.SX7P) up nearly 1% as the European Central Bank prepared to start the largest cash withdrawal from the eurozone banking system in its history.
Banks are expected to repay around €500 billion in Targeted Long-Term Refinancing Operations (TLTRO) loans. The ECB announcement is expected at 1105 GMT.
Britain’s FTSE Index (.FTSE) rose 0.33%, a day after Finance Minister Jeremy Hunt announced tax hikes and spending cuts in a bid to reassure markets that the government is serious about fighting inflation.
Data on Friday showed that British retail sales recorded only a partial recovery last month after stores closed in September for the funeral of Queen Elizabeth, and remained below the pre-pandemic level as high inflation affected the ability to spend.
“Although the Bank of England is likely to continue raising interest rates despite the slowdown in the economy, their peak is likely to be lower than in the US,” said Dean Turner, head of the eurozone and UK economist at UBS Global Wealth Management.
US 2-year yields crept back to 4.48%, reversing slightly from last week’s sharp inflation-driven drop of 33 basis points to 4.29%.
That left it 69 basis points above 10-year yields, the biggest reversal since 1981 and an indication of an impending recession.
The dollar settled at 106.65 for a basket of currencies, after touching a three-month low of 105.30 early in the week.
The US currency settled at 140.23 yen, but held above its recent low of 137.67. The British pound rose 0.3 percent to $1.1904.
The euro settled at $1.0357, after retreating from a four-month peak of $1.0481 hit on Tuesday as some policymakers called for caution on tightening.
European Central Bank President Christine Lagarde will deliver a keynote speech later on Friday that may provide guidance on which way the bank’s majority might lean.
MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) was flat.
China blue chips (.CSI300) fell 0.45% amid reports that Beijing asked banks to scrutinize liquidity in the bond market after rising yields caused losses for some investors.
There have also been concerns that a surge in COVID-19 cases in China could challenge plans to ease strict movement restrictions that have choked the economy.
Japan’s Nikkei (.N225) fell 0.1% as data showed inflation rose to a 40-year high as a weaker yen pushed up import costs.
However, the Bank of Japan argues that inflation is mostly driven by energy costs that are beyond its control and that the economy needs ultra-easy policies.
Brent crude hit a four-week low amid concerns about weak demand in China and an interest rate hike by the Federal Reserve.
Brent crude hit a low of $89.51 a barrel, down 0.2%. The US crude price settled at $81.67 a barrel.
Gold rose 0.1% to $1,763 an ounce, after hitting a three-month high of $1,786 early in the week.
Editing by Bradley Perrett, Sam Holmes and Simon Cameron-Moore
Our Standards: The Thomson Reuters Trust Principles.
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