U.S. equities climbed on Wednesday while Treasury yields retreated after the Federal Reserve increased interest rates by +0.75%, intensifying its fight against inflation.
The +0.75% increase was the largest single move since 1994, with Powell also noting that another +0.75% or +0.50% increase was likely at the next meeting while noting he does not expect moves of this size to be common. Powell noted “the US economy is in a strong position, and well-positioned to deal with higher interest rates” also adding he saw no signs of a broader slowdown and would like to see demand moderating and officials won’t “declare victory” until they see compelling evidence inflation is coming down. Officials also updated their economic projections, with inflation now forecast to rise at +5.2% in 2022 up from +4.3% in the March projections based on the median estimate. GDP is expected to slow to +1.7% this year compared with +2.8% previously and unemployment could rise to +4.1% by the end of 2024 from +3.6% previously forecast. Finally, officials see interest rates increasing to +3.4% in 2022, rising further to +3.8% in 2023 before moderating to +3.4% again in 2024 and back towards +2.5% over the longer term.
The rally is risks assets suggests the market welcomes the commitment to tackle inflation with more aggressive rate hikes as well as the flexibility to move to larger increases based on incoming data. The S&P500 climbed +1.46% with 10 out of 11 sectors advancing led by consumer discretionary +3.02% and communications +2.36% while energy -2.13% was lower tracking a decline in the price of oil. The Dow Jones also rose +1.0%, as did the Nasdaq Composite +2.50% and Russell 2000 +1.36% with the VIX falling -9.39% to 29.62. Treasury yields retreated across the board with the 2-year rate down -22.8 basis points along with the 10 and 30-year yields which declined -18.8 and -9.6 basis points respectively. While the 1-year breakeven inflation rate declined -6.8 basis points to 5.276%, further out the curve expectations edged higher, helping to push real yields across 5 and 10-year down by -26 and -21 basis points to +0.377% and +0.606% weighing on the U.S. dollar index which declined -0.63% to 104.85.
European stocks rose after an emergency meeting by the ECB which moved to temper a rout in bonds. At the unscheduled meeting, the ECB said it would skew reinvestments of maturing debt to help more indebted eurozone members and devise a new instrument to stop fragmentation of the block’s bond market. While the design of such an instrument is unclear, the announcement should provide some relief to markets and may provide the ECB with room to raise rates more aggressively to tackle inflation. The Euro Stoxx 600 advanced +1.42% along with the DAX +1.36%, CAC +1.35% and FTSE100 +1.20% with benchmarks across the region higher, led by Italy’s FTSE MIB +2.87%. Government bond yields across the region fell with 10-year yields down between -3.5 basis points in Sweden to as much as -36.4 basis points in Italy, with the biggest declines seen in bond yields of the most indebted countries.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX looks set to rise this morning with ASX200 futures up +24 points or +0.37% to 6,518. The index declined -1.27% on Wednesday with all sectors lower led by declines in technology -3.09% and real estate -2.95% with 79% of stocks finishing the session lower. Concerns of higher inflation weighed on sentiment after the Fair Work Commission raised the minimum wage by +5.2% which in turn may spur inflation and more aggressive tightening from the RBA. Elsewhere, the energy sector came under pressure declining -2.41% with the price of oil retreating as well as the Australian Energy Market Operator taking the unprecedented action of closing the spot electricity market. Under the move, the AEMO has temporarily seized control of the supply of power from generators to stabilize the grid and avoid blackouts in the next few days. In economic data, the Westpac consumer confidence measure for June declined to 86.54 from 90.4 while Chinese data for the 12 months to May was better than expected. Fixed asset investment in China eased to +6.2% from +6.8% previously, although higher than the 6% forecast, with retail sales declining -6.7% compared with estimates of a -7.1% decline.
Oil prices retreated, weighed by the Federal Reserve’s actions to tighten monetary policy as well as US President Joe Biden demanding oil refining companies explain why they are not putting more gasoline on the market, sharpening his rhetoric as he faces pressure over rising prices. In a letter to energy companies, Biden said “At a time of war, refinery profit margins well above normal being passed directly onto American families are not acceptable”. However, US refiners say they are running near peak capacity at 94% and there is little they can do to satisfy Biden’s demands with refining capacity decreasing over the past 2-years as unprofitable facilities closed during the pandemic and several more have been announced since March. Both WTI and Brent crude retreated -3.04% and -1.97% to US$115.31 and US$118.78 a barrel. Iron ore futures in Singapore declined -2.84% on Wednesday although have mostly reversed those losses trading +2.45% higher at US$132.60 this morning. Gold rose +1.40% to US$1,833 along with silver +3.04% while Bitcoin was -1.48% lower.
Economic data:
- Australian Unemployment (MoM May) 11:30
- Bank of England Rate Decision 21:00
- U.S. Initial Jobless Claims (11th Jun) 22:30
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
