Fed chair Jerome Powell’s comments that the US will probably avoid recession lifts global mood
27 July 2023 - 12:03
byMarc Jones
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World shares were at a 15-month high and the euro strengthened on Thursday as the markets’ focus shifted from a widely expected nudge in US interest rates to what is almost certain to be a similar move by the European Central Bank (ECB) later.
With investors sensing the most aggressive rise in world borrowing costs in the past 40 years is finally cresting, MSCI’s 47-country ACWI stocks index was at the highest since April last year, having surged 30% since November.
Investors are now waiting for the ECB at 12.15pm GMT, which like the Fed is expected to hike by another quarter point as it approaches the end of its tightening campaign. There is also the Bank of Japan on Friday, where speculation has risen that it could begin shifting too.
The pre-ECB moves saw gains across Europe with the Stoxx 600 up 1%, Amsterdam at the highest since the start of 2022 and the euro firm 0.4%.
Nasdaq futures advanced 0.6%, helped by a 6.8% jump in Meta Platforms in after-hours trading. Facebook’s parent company reported a strong rise in advertising revenue, topping Wall Street targets.
In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan added 1% to reach the highest in five months. Japan’s Nikkei also advanced 0.7% to a three-week top.
Hong Kong's Hang Seng index rallied too, driven by a near 5% surge in Chinese property stocks, as they extended a rebound started this week when a top Politburo meeting fuelled hopes that more support to a battered sector is on the way.
Overnight, the Fed delivered a 25 basis-point rate hike as widely expected, and chair Jerome Powell said in a media conference after the announcement that the central bank no longer expects a recession.
“Even though the Fed has left the door open for an additional rate hike before the end of the year, we believe that we’ve now reached peak cycle — the Fed tightening cycle is done,” said David Chao, a global market strategist at Invesco.
“We expect an increasing global risk appetite as markets continue to positively re-price recession risks, and ultimately look forward to and discount an economic recovery that could begin to unfold late this year.”
Futures imply only a slim chance — about 20% — that the central bank could surprise with a quarter-point increase in September. They also moved to price in sizeable rate cuts of 125 basis points (bps) by the end of next year.
ECB ahead
The ECB is generally expected to raise interest rates by a quarter-point at its rate decision, though markets sense the end is also in sight, with at most one more hike expected after this week.
However, the slow retreat in inflation could pile pressure on policymakers to keep going or at least keep rates higher for longer.
“We, and the market, expect a 25 basis-point [hike],” Jefferies economist Mohit Kumar said. “But the key would be the guidance for future policy meetings ... The market is pricing in a peak rate of 3.96%. In our view a 50:50 chance of another hike will be closer to fair.”
The Bank of Japan meets on Friday amid speculation of more tweaks to its ultra-loose monetary policy known as “yield curve control”, where its keeps market borrowing costs in a tight range.
The majority view is policymakers won’t change that just yet, according to a Reuters survey, Still some investors, including JPMorgan, see the key 10-year band being widened to about 100 bps.
The yen climbed to as high as ¥139.35/$ but was last near the ¥140 level. Overnight dollar/yen implied volatility jumped to 36.3%, the highest since March.
The dollar continued to be pressured in Europe, weakening 0.2% against a basket of major currencies. Both the risk-sensitive Australian dollar and New Zealand dollar were up as much 0.8%.
In the debt markets, eurozone government bond yields — a proxy for borrowing costs — were lower again before the ECB meeting.
Treasury yields were mostly steady too. The 10-year US Treasury note held at 3.86%, after a drop of 6 bps overnight, while the rate-sensitive two-year was little changed at 4.8329%, having also eased 7 bps.
Gold prices edged 0.2% higher to $1,976.18 an ounce.
Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
Investors buoyant as rates appear to have peaked
Fed chair Jerome Powell’s comments that the US will probably avoid recession lifts global mood
World shares were at a 15-month high and the euro strengthened on Thursday as the markets’ focus shifted from a widely expected nudge in US interest rates to what is almost certain to be a similar move by the European Central Bank (ECB) later.
With investors sensing the most aggressive rise in world borrowing costs in the past 40 years is finally cresting, MSCI’s 47-country ACWI stocks index was at the highest since April last year, having surged 30% since November.
Investors are now waiting for the ECB at 12.15pm GMT, which like the Fed is expected to hike by another quarter point as it approaches the end of its tightening campaign. There is also the Bank of Japan on Friday, where speculation has risen that it could begin shifting too.
The pre-ECB moves saw gains across Europe with the Stoxx 600 up 1%, Amsterdam at the highest since the start of 2022 and the euro firm 0.4%.
Nasdaq futures advanced 0.6%, helped by a 6.8% jump in Meta Platforms in after-hours trading. Facebook’s parent company reported a strong rise in advertising revenue, topping Wall Street targets.
In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan added 1% to reach the highest in five months. Japan’s Nikkei also advanced 0.7% to a three-week top.
Hong Kong's Hang Seng index rallied too, driven by a near 5% surge in Chinese property stocks, as they extended a rebound started this week when a top Politburo meeting fuelled hopes that more support to a battered sector is on the way.
Overnight, the Fed delivered a 25 basis-point rate hike as widely expected, and chair Jerome Powell said in a media conference after the announcement that the central bank no longer expects a recession.
“Even though the Fed has left the door open for an additional rate hike before the end of the year, we believe that we’ve now reached peak cycle — the Fed tightening cycle is done,” said David Chao, a global market strategist at Invesco.
“We expect an increasing global risk appetite as markets continue to positively re-price recession risks, and ultimately look forward to and discount an economic recovery that could begin to unfold late this year.”
Futures imply only a slim chance — about 20% — that the central bank could surprise with a quarter-point increase in September. They also moved to price in sizeable rate cuts of 125 basis points (bps) by the end of next year.
ECB ahead
The ECB is generally expected to raise interest rates by a quarter-point at its rate decision, though markets sense the end is also in sight, with at most one more hike expected after this week.
However, the slow retreat in inflation could pile pressure on policymakers to keep going or at least keep rates higher for longer.
“We, and the market, expect a 25 basis-point [hike],” Jefferies economist Mohit Kumar said. “But the key would be the guidance for future policy meetings ... The market is pricing in a peak rate of 3.96%. In our view a 50:50 chance of another hike will be closer to fair.”
The Bank of Japan meets on Friday amid speculation of more tweaks to its ultra-loose monetary policy known as “yield curve control”, where its keeps market borrowing costs in a tight range.
The majority view is policymakers won’t change that just yet, according to a Reuters survey, Still some investors, including JPMorgan, see the key 10-year band being widened to about 100 bps.
The yen climbed to as high as ¥139.35/$ but was last near the ¥140 level. Overnight dollar/yen implied volatility jumped to 36.3%, the highest since March.
The dollar continued to be pressured in Europe, weakening 0.2% against a basket of major currencies. Both the risk-sensitive Australian dollar and New Zealand dollar were up as much 0.8%.
In the debt markets, eurozone government bond yields — a proxy for borrowing costs — were lower again before the ECB meeting.
Treasury yields were mostly steady too. The 10-year US Treasury note held at 3.86%, after a drop of 6 bps overnight, while the rate-sensitive two-year was little changed at 4.8329%, having also eased 7 bps.
Gold prices edged 0.2% higher to $1,976.18 an ounce.
Reuters
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