Stocks Wobble on Amped Up Policy-Tightening Bets:
RBA rate rise shows policymakers determined to quell inflation
Swap traders boost odds Fed will raise by a quarter point
European stocks retreated and US equity futures wobbled after Australia’s unexpected interest-rate increase deepened conviction that US and European central banks push ahead with policy tightening to stamp out inflation.
The Stoxx 600 index slipped as much as 0.4%, held down by growth-sensitive sectors such as energy and real estate. HSBC Holdings Plc bucked the decline after a profit beat and a $2 billion share buyback. Contracts on the S&P 500 and Nasdaq swung between losses and gains, after both indexes closed modestly weaker on Monday.
A government-brokered deal for JPMorgan Chase & Co. to acquire the troubled First Republic Bank drew a line for now under US banking turbulence. But investors fear lending will be crimped, slowing an economy already under pressure from the most aggressive rate-hike campaign in decades. Euro zone data reinforced these fears, showing banks had curbed lending more than anticipated.
The Federal Reserve’s two-day meeting starting Tuesday is expected to raise rates by a quarter point. In the euro zone, preliminary data showed a further acceleration in headline inflation, though the so-called core measure slowed for the first time in 10 months. The European Central Bank is seen likely to opt for a 25 basis-point increase at its meeting this week, though a bigger half-point move is not ruled out.
“There is a likelihood inflation will remain a real bugbear for the majority of central banks and that the global economy has to adjust to a new normal where inflation is stickier and interest rates stay high,” said Rabobank strategist Jane Foley. “This brings the increased risk of more fragilities in the system as we have seen with the banks in the US.”
Earlier, the Reserve Bank of Australia hiked benchmark rates by 25 basis points to 3.85%, saying inflation remained too high and further tightening may be required. That pushed Australia’s dollar as much as 1.2% stronger and lifted rate-sensitive three-year local yields more than 20 basis points.
“The RBA’s hike today is likely to ramp up the market’s hawkish expectations for the Fed this week,” said David Forrester, strategist at Credit Agricole CIB in Singapore.
Swap traders have upgraded the odds the Fed will raise its policy rate by a quarter point Wednesday, while also increasing expectations for peak ECB rates.
While Treasury yields slipped after a late-Monday surge, German, French and Italian yields initially rose as much as 10 basis points across the curve, before paring gains to 5 to 6 basis points.
On currency markets, the dollar was flat against its main Group-of-10 peers. The euro slipped as the slower core inflation and bank lending appeared to tilt odds in favor of a 25 basis-point rate increase.
Oil prices steadied after earlier losses driven by concerns over China’s economic outlook and the impact of US banking turmoil. Prices have dropped more than 5% already this year.
Key events this week:
- US JOLTS job openings, factory and durable goods orders, Tuesday
- ADP employment, S&P global US services PMI, ISM services, Wednesday
- Fed Chair Jerome Powell holds news conference following rate decision, Wednesday
- US initial jobless claims, trade balance, Thursday
- European Central Bank rate decision, followed by ECB President Christine Lagarde’s news conference, Thursday
- US unemployment, nonfarm payrolls, Friday
Source: Bloomberg.com