Dollar up as hardening Fed-hike bets sow caution: markets wrap

Stocks and US equity futures were subdued Thursday and the dollar climbed after high US inflation hardened expectations of more aggressive Federal Reserve monetary tightening that could trigger recession.

An Asian share index struggled for traction, though Chinese technology stocks provided a modest lift. S&P 500 and Nasdaq 100 contracts wavered and those for Europe eked out an advance.

Traders have shifted toward expectations of an historic one percentage-point Fed interest-rate hike later this month after the US consumer-price gauge clocked a 9.1% annual climb. Fed Bank of Atlanta President Raphael Bostic said “everything is in play” to combat price pressures.

The dollar pushed higher, hovering around the highest level in over two years. Treasury two-year yields, sensitive to imminent Fed moves, climbed while longer-maturity rates were more stable. The inversion between two-year and 10-year yields — a potential recession indicator — is the deepest since 2000.

The euro fell back toward $1 after briefly dipping below it Wednesday. The yen sank. Oil hovered at $96 a barrel. Bitcoin rallied past $20 000, weathering the bankruptcy filing of crypto lender Celsius Network.

In Singapore, the city state’s currency strengthened on an unexpected tightening of monetary settings, part of a global wave of steps to curb the cost of living. Australian bond yields surged on a strong jobs report, which boosted the case for a further increase in borrowing costs there too.

The big question for markets is whether the latest US inflation print marks the peak. Commodity prices, pushed up this year in part by supply disruptions related to Russia’s war in Ukraine, have moderated somewhat of late.

But if higher costs prove to be persistent and come alongside a global economy buckling under rate hikes, that could be toxic for a range of assets already nursing heavy losses in 2022.

At this point, markets may be getting ahead of the Fed, according to Danielle DiMartino Booth, Quill Intelligence chief strategist. “We need to move the discussion onto how long is the recession going to be, how deep it’s going to be,” she added.

Beyond neutral

Fed Bank of Cleveland President Loretta Mester said in a Bloomberg Television interview the consumer-price report was uniformly bad and that the central bank will need to go well beyond the neutral level of rates. The figures don’t suggest a smaller hike than in June, she added.

Swaps referencing Fed meetings are priced for the policy rate to peak at about 3.7% this December, up from the current target range of 1.50%-1.75%. Traders then expect the Fed to start cutting rates to counter an economic slowdown.

The earnings season is the next test for markets, kicked off in the US by JPMorgan Chase & Co. and Morgan Stanley on Thursday.

What to watch this week:

• Earnings due from JPMorgan, Morgan Stanley, Citigroup, Wells Fargo
• US PPI, jobless claims, Thursday
• China GDP, Friday
• US business inventories, industrial production, University of Michigan consumer sentiment, Empire manufacturing, retail sales, Friday
• G-20 finance ministers, central bankers meet in Bali, from Friday
• Atlanta Fed President Raphael Bostic speaks, Friday

Some of the main moves in markets:

Stocks

• S&P 500 futures slid 0.1% as of 6:30 a.m. in London. The S&P 500 fell 0.5%
• Nasdaq 100 futures fell 0.1%. The Nasdaq 100 fell 0.1%
• Japan’s Topix index added 0.3%
• South Korea’s Kospi index increased 0.2%
• Australia’s S&P/ASX 200 index added 0.5%
• China’s Shanghai Composite Index rose 0.1%
• Hong Kong’s Hang Seng Index fell 0.2%
• Euro Stoxx 50 futures rose 0.4%

Currencies

• The Bloomberg Dollar Spot Index rose 0.2%
• The euro fell 0.3% to $1.0033
• The Japanese yen was at 138.03 per dollar, down 0.5%
• The offshore yuan was at 6.7300 per dollar, down 0.1%

Bonds

• The yield on 10-year Treasuries rose about two basis points to 2.95%
• Australia’s 10-year bond yield climbed four basis points to 3.43%

Commodities

• West Texas Intermediate crude was at $96.50 per barrel, up 0.2%
• Gold fell 0.5% to $1 726.74 an ounce