World shares slip after glum interest-rate prediction by Jerome Powell

London/Singapore — Global shares eased on Thursday after US Federal Reserve chair Jerome Powell indicated rates had further room to rise, while the dollar held steady against the pound ahead of the Bank of England’s decision on monetary policy later on Thursday.

The MSCI all-world index was down 0.1%, heading for a fifth straight day of declines, its longest losing streak in three months.

Last week, the Fed held its benchmark interest rate steady at between 5% and 5.25%, but officials projected rates will have to increase another half percentage point by the end of 2023 to tame inflation.

Powell in his remarks to legislators in Washington said the outlook for two further 25-basis-point (bps) rate increases are “a pretty good guess” of where the central bank is heading if the economy continues in its current direction.

Markets, though, remain unconvinced, pricing in a 72% probability of a 25 bps hike in July, but no further hikes after that, according to the CME FedWatch tool.

Kevin Cummins, chief economist at NatWest Markets, said Powell’s testimony did not shed any new light on the Fed’s thinking or the likely future path for monetary policy, adding that his tone was very similar to last week's press conference and mostly leant hawkish.

“It's clear that the FOMC wants the market to understand that a hike will be on the table for debate at the next meeting. The Fed's data-dependent approach in this tightening cycle suggests upcoming data releases could shift expectations.”

Atlanta Federal Reserve president Raphael Bostic said on Wednesday the Fed should not raise rates further or it would risk “needlessly” sapping the strength of the US economy.

The comments highlight the growing debate at the central bank over when and if the central bank should hike further.

“The next six months, as much as we would like to stop talking about the Fed, but it's going to be the continued driver of sentiment in the market,” said Michael Dyer, investment director, multi assets at M&G Investments.

US stock futures fell 0.2%-0.3%, indicating a weaker start on Wall Street later.

The S&P 500 index is heading for a third successive quarterly gain, thanks in large part to mega-cap technology stocks that have benefited from the growing interest in artificial intelligence, but also down to the resilience of the underlying economy.

“As long as economic activity doesn't weaken too far in the face of rate hikes, then stocks should be OK as well,” Daiwa Capital Markets head of economic research Chris Scicluna said.

“The hope is still that the Fed and the ECB could get away with another couple of rate hikes without necessarily causing recession down the track, with continued soft growth.”

How high?

The Bank of England is up next. Money markets on Thursday showed traders believe there is an equal chance of the central bank raising rates by a quarter point or a half point, given how core inflation is still accelerating.

The case for more aggressive tightening is so much stronger here,” Daiwa's Scicluna said. “There is a non-negligible risk of 50 basis points — the data almost call for it.”

Sterling, which has gained nearly 4% this quarter thanks to the expectation of more rate hikes from the BoE, was last steady at $1.2767, not far off last week's 14-month peak at $1.2849.

The euro was flat against the dollar at $1.0992, but down 1% against the Norwegian crown after the Norwegian central bank delivered a much larger rate rise than expected.

Against a basket of currencies, the dollar was mostly steady on the day, hovering at about one-month lows.

Markets will also be awaiting a policy decision from Turkey’s central bank, with a policy pivot and a sharp rate increase widely expected.

The Turkish lira has skidded to record lows since May’s election and was last at 23.56/$.

US crude fell 0.7% to $72 a barrel, as did Brent crude futures, which fell 0.7% to $76.56, while gold dropped 0.3% to $1,926/oz, just above Wednesday's three-month low.

Reuters