Dollar Rallies, Stocks Decline on Fed Hike Bets:
- The 10-year Treasury yield is near the highest this year
- Two Fed officials opened door to a 50 basis-point rate hike
The dollar rallied and stocks dropped alongside US equity futures with expectations of steeper US rate hikes growing after comments by two Federal Reserve officials.
The Bloomberg dollar gauge rose as much as 0.5%, erasing its losses for the year, while benchmark Treasury yields climbed for a fourth day. Yields on two-year and 10-year Treasuries both set 2023 highs this week. Data on Thursday showed that US producer prices rebounded in January by the most since June.
An Asian stock benchmark was set for a third straight weekly slide, the worst such run of losses since October. Contracts for both the S&P 500 and Nasdaq 100 retreated after the underlying indexes sank more than 1% on Thursday.
Federal Reserve Bank of Cleveland President Loretta Mester said she had seen a “compelling economic case” for rolling out another 50 basis-point hike, and St. Louis President James Bullard said he would not rule out supporting a half-percentage-point increase at the March meeting. While Mester and Bullard participate in deliberations, they do not vote on monetary policy decisions this year.
The market has been “a little bit too sanguine” so far this year concerning any imminent Fed pivot, according to Helen Zhu, chief investment officer at Hong Kong-based Nan Fung Trinity.
“We don’t necessarily think there’s going to be a 50-basis-point rate hike at this next Fed meeting, but we do think that the expectations for a lot of cuts in the second half of this year are probably overdone,” Zhu said on Bloomberg Television.
Investors have been upping their bets on how far the Fed will raise rates this tightening cycle. They now see the federal funds rate climbing past 5.2% in July, according to trading in the US money markets. That compares with a perceived peak rate of 4.9% just two weeks ago.
For Commerzbank AG, the dollar still has room to run. “As long as inflation is not coming down, the US dollar will benefit,” Esther Reichelt, a foreign exchange strategist at the bank, said on Bloomberg Television. “It’s not what we are seeing, but that’s definitely the risk,” she said.
Australian bond yields rose, following the moves in Treasuries, and as the nation’s central bank chief spoke in parliament. Governor Philip Lowe said further rate increases would be needed to tame rising prices as policy makers balanced two key risks.
“One is the risk of not doing enough, which would result in high inflation persisting and then later proving very costly to get down,” Lowe said. “The other is the risk that we move too fast, or too far.”
Most of the dollar bonds issued by Indian conglomerate Adani Group exited distressed territory after it said it will address upcoming maturities of the debt. The move is seen as the group’s latest effort to boost investor sentiment after a rout sparked by a US short-seller report.
Bitcoin retreated after three days of gains that were fueled by easing fears of a US regulatory crackdown.
In commodities, oil headed for a weekly drop as rising US inventories and the prospect of further tightening by the Federal Reserve eclipsed the lift from more signs that Chinese energy demand is improving. Gold fell.
Source: Bloomberg.com