Bloomberg – Bonds rise and the dollar maintains its decline on Thursday amid a flurry of relief from investors after the Federal Reserve raised interest rates as expected to tackle inflationwhile countering fears of large rallies.
In Asia-Pacific stock markets, Australia gains and futures point to a positive open in Hong Kong. US contracts fluctuated after a 3% rise in the S&P 500 index, the biggest since 2020.
Australian debt rises after a sharp plunge in yields on shorter-maturity US Treasuries, as traders reduced bets on aggressive monetary tightening.
Fed Chairman Jerome Powell said a 75 basis point hike “not something the committee is actively considering,” which fueled a market rally. The Fed raised rates by half a point and signaled similar moves for upcoming meetings.
“Removing some of the uncertainty helps get some of the cash that’s been on the sidelines back into the markets, whether it’s bonds or stocks.” said Erin Gibbs, chief investment officer at Main Street Asset Management LLC, on Bloomberg Television.
The US central bank will also let its holdings of Treasuries and mortgage-backed securities decline in June at an initial combined monthly pace of $47.5 billion, to rise in three months to $95 billion
Market reaction is likely to evolve as investors digest Powell’s comment. A global wave of monetary tightening coupled with commodity price pressures could still hurt economic growthRussia is continuing its war in Ukraine and a virus outbreak in China is paralyzing supply chains.
Rises in oil and wheat underscored the risks. Crude hit $108 a barrel following the European Union’s plan to ban Russian barrels for the next six months. Wheat rose on the possibility that top producer India will curb exports.
“The market is overly optimistic about the Fed’s ability to tame inflation,” Nancy Davis, chief investment officer at Quadratic Capital Management LLC, wrote in a note. “We may be facing an environment of stagflation.”
Swaps linked to Fed meetings are now pricing less than 150 basis points of further rate hikes from June, July and September decisions. This indicates that there are doubts about the scope of three other hikes of 50 basis points each.
Chinese markets will resume trading after a three-day pause and could offset some of that US tailwind. Skepticism persists over whether Beijing is doing enough to loosen regulatory restrictions or spur growth as Covid lockdowns take their toll.
Later in Europe, the Bank of England is expected to raise rates to their highest level in 13 years and clarify how it plans to sell some of its 847 billion pounds ($1.1 trillion) in government bond holdings.
Japan is closed for a holiday, which excludes cash Treasury bond trading in Asia.