Dazed share markets were trying to steady on Thursday as Chinese stocks eked out rare gains and investors stuck to bets for sizable cuts in US interest rates even if the kick-off date might now be a little later than first hoped.
Europe’s bourses started in the red as traders hoped euro zone inflation data and a Bank of England interest rate decision due later would divert attention from what had been Wall Street’s worst rout since September on Wednesday.
The Federal Reserve committee’s decision to hold rates at 5.25-5.5% had been no surprise, but it emphasised that rates would not be cut until it had more confidence that inflation was truly beaten.
In a media conference, Fed chair Jerome Powell flatly stated a cut as early as March seemed unlikely, but also conceded that everyone on the committee was looking to ease this year.
One of the more dovish aspects of Powell’s remarks was the asymmetry on employment: strong employment gains won’t necessarily forestall rate cuts, but weak employment gains would ‘absolutely’ hasten rate cuts, wrote analysts at JPMorgan.
We are sticking with our call for a first cut in June, but after Powell’s remarks it’s not hard to see a configuration of employment and inflation data that gets the Committee cutting by May.
Investors nudged up European bond yields — which move inverse to price — in early dealing but there was a long way to go with the Bank of England expected to keep UK rates on hold at 1200 GMT and euro area inflation data at 1300 GMT.
Following Powell’s comments, markets actually doubled down on a May Fed move, pricing in 32 basis points of cuts — implying a 100% probability of 25 basis points and some chance of a 50 basis-point easing.
Barring a material weakening in economic activity, we believe the Fed will wait until closer to mid-year to begin its easing cycle with a 25 basis point rate cut, economists at PIMCO said.
As for subsequent rate cuts, the Fed’s latest projections suggest a 25 bps cut at every other meeting.
The possible Fed slippage pushed the dollar toward its loftiest level of the year against the top world currencies, including a six-week peak against the euro although Sweden’s crown played its part too as the Riksbank held rates again.
Investors also seemed to be wagering that the more the Fed delayed now, the more aggressive it would have to cut in the future given slowing inflation would sharply lift real rates.
As a result, Fed fund futures for December have priced in a further 11 basis points of easing this year taking the total expected to 141 basis points.
Likewise, Treasuries rallied strongly as 10-year yields dived 12 basis points to 3.91% in the wake of the Fed decision. Some of those gains were then pared in Europe, nudging yields up to 3.94%.
The rush into bonds was further encouraged by renewed jitters over regional US banks when New York Community Bancorp crashed 37% to the lowest in over two decades after posting a surprise loss.
That spilled over into other bank stocks and contributed to a sharp 1.6% pullback in the S&P 500 late Wednesday, while the Nasdaq had already been pressured by falls from Google parent Alphabet and Tesla.
Thursday saw a steadying though. S&P 500 futures added 0.2%, while Nasdaq futures firmed 0.4%. Markets face a major test later in the day with results out from tech giants Apple, Amazon and Meta.
The choppy trading had made Asian markets cautious overnight. MSCI’s broadest index of Asia-Pacific ending down 0.4% although sentiment was helped by a stabilisation in Chinese blue chips, along with some better surveys on home prices and manufacturing.
Japan’s Nikkei eased 0.8% as the yen gained. South Korea bounced 1.8% following upbeat trade data and a survey showing factory activity grew for the first time in 19 months.
Currency markets were jolted by the mixed reaction to the Fed, with the dollar gaining on the euro but losing to the yen as bond yields slid.
The euro was at US$1.0787, after ending Wednesday down a slight 0.2%. The dollar held at 146.63 yen, having fallen as far as 146.00 yen at one stage overnight.
Gold also gyrated in the wake of the Fed, and was last up 0.2% at US$2,041 an ounce.
Oil prices pared some of the sharp losses suffered on Wednesday, as tensions in the Middle East helped offset concerns about oversupply and soft global demand.
Brent futures edged up 27 cents to US$80.82 a barrel, while US crude rose 27 cents to US$76.12 per barrel.
