Global markets kept in check by cool Fed minutes

European and Asian shares eked out slim gains on Thursday as strong earnings in the semiconductor sector were overshadowed by news overnight that the US Federal Reserve would continue on its path of raising rates to quell inflation, albeit with smaller steps.

The dollar steadied, while oil edged up as WTI crude dug in its heels after a six-day losing streak.

Better-than-expected revenue at chip giant Nvidia after hours sent its shares up 9% on Wall Street, helping to push Nasdaq futures 0.9% higher on Thursday, along with shares in Taiwan Semiconductor Manufacturing and European peers such as ASM International and BE Semiconductor.

The MSCI all country share index was slightly firmer, adding to the year’s 4.5% advance after falling nearly 20% in 2022.

“I think the market is pricing in a slightly more aggressive Fed tightening than perhaps was going to be the consensus, but I don’t think it’s going to change that much,” said Mike Hewson, chief markets strategist at CMC Markets.

In Europe, the Stoxx index of leading European companies was 0.2% firmer, building on its 8.8% gain for the year and erasing much of last year’s 13% loss.

Nearly all Fed policymakers backed further slowing the pace of rate hikes, according to the minutes of the US central bank’s last policy meeting, but they also indicated that curbing unacceptably high inflation would be the “key factor” in how much further rates need to rise.

Analysts say the early-year rally in stocks has succumbed to a realisation that the Fed will continue to increase interest rates to cool the economy and tame inflation. That has pushed bond yields higher, making risky stocks less attractive, with the Fed’s next meeting nearly a month away on March 22.

The yield on 10-year Treasury was slightly firmer at 3.9254%.

Eren Osman, MD of wealth management at Arbuthnot Latham & Co., said bond yields were starting to price in a higher terminal rate of 5.5% rather than 5.25% for the Fed.

“From the minutes of the Fed, I take out of it a bonus that they appear to be more balanced in their inflation outlook; they recognise risks to the economy are skewed to the downside,” Osman said.

“The idea that we see rate cuts later in the year are quite rightly being discounted to a greater extent,” Osman said. “In the absence of a clear reversal in the current easing of inflation, we feel comfortable that yields have kind of topped out within this cycle.”

Analysts said markets were bracing for a “no landing” scenario where global economic growth is resilient and inflation stays higher for longer, leading investors to dial back appetite for risk assets and government debt.

More data due

MSCI’s broadest index of Asia-Pacific shares outside Japan touched its lowest level since January 6 in early trade, but rose about 0.3% as the day progressed.

The Bank of Korea also offered some relief by ending a year-long run of uninterrupted rate hikes with a pause, as expected.

The Australian and New Zealand dollars were both slightly firmer against the dollar, while the euro was little changed at $1.060. The dollar pegged against a basket of currencies reversed losses to edge higher.

Wall Street indices fell overnight and are eyeing their worst week of the year so far as stronger-than-forecast US labour, inflation, retail sales and manufacturing figures have traders pricing interest rates staying higher for longer.

Gold steadied at $1,826 an ounce.

Final European inflation and US growth figures are due later in the day, though no major adjustments to preliminary numbers are expected. Fed officials Mary Daly and Raphael Bostic are also due to make appearances later on Thursday.