Global stocks gain as dollar climbs on Warsh remarks
MSCI’s global equities gauge rose and short-dated US Treasury yields climbed with the dollar yesterday as traders added to bets for an interest rate hike after a speech by Federal Reserve Chair Kevin Warsh.
Warsh said at the Fed’s annual economic symposium in Jackson Hole that the US central bank will “have work to do” if policymakers are not confident that underlying inflation is returning to its two per cent target, in remarks that acknowledged financial conditions do not appear restrictive.
After the comments, bets that rates would be raised at the September meeting rose to a 55.7pc probability from 35.4pc on Thursday, according to CME Group’s FedWatch tool.
Three Fed officials have already warned about sticky inflation, but Warsh had previously resisted giving forward guidance on the path of interest rates.
“He had to come out and say something about the policy outlook, reiterating the Fed’s intent to control inflation, reinforcing the Fed’s inflation-fighting credentials,” said Gary Schlossberg, global strategist at Wells Fargo Investment Institute.
“He threw a lot of dots out there and when you connect them, in effect, that’s what he was saying. Unless inflation rolls over, and we don’t expect it to. If anything, the pressure may build a bit over the next 6 to 8 months. He didn’t come right out and say it, but all the ingredients seem to be there at this point for at least one rate increase, if not more, going forward.”
Among Wall Street indexes, at 11.09am ET the Dow Jones Industrial Average rose 162.95 points, or 0.30pc, to 53,732.39, the S&P 500 rose 29.12 points, or 0.38pc, to 7,760.11 and the Nasdaq Composite rose 111.40 points, or 0.41pc, to 26,652.75. MSCI’s gauge of stocks across the globe rose 2.76 points, or 0.24pc, to 1,157.46 while the pan-European STOXX 600 index rose 0.56pc.
In the bond market, the 2-year note yield, which typically moves in step with interest rate expectations for the Federal Reserve, rose 7.84 basis points to 4.312pc, from 4.232pc late on Thursday.
The yield on benchmark US 10-year notes rose 2.01 basis points to 4.692pc, while the 30-year bond yield fell 0.73 basis points to 5.1837pc from 5.191pc late on Thursday.
“Markets took it a bit hawkishly. We saw the market price in more hikes,” said Molly Brooks, US rates strategist at TD Securities.
“The one hawkish thing to note is that he did mention that the labour market is stable and output is strong, and then obviously they’re concerned around inflation, so I think that’s what led markets to view this as somewhat hawkish.”
In currencies, the US dollar extended gains after Warsh hinted that rate hikes may be needed. The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.36pc to 99.47, with the euro down 0.35pc at $1.161.
Against the Japanese yen, the dollar strengthened 0.33pc to 159.92. In cryptocurrencies, bitcoin fell 0.89pc to $79,382.45. Meanwhile, oil prices drifted lower on the day and were on track for their first weekly decline in three weeks as traders weighed crude flows making it through the Strait of Hormuz against the deadlock in US-Iran diplomacy.
US crude fell 0.63pc to $83.00 a barrel and Brent fell to $89.40 per barrel, down 0.33pc on the day. In precious metals, spot gold fell 0.61pc to $4,572.99 an ounce while spot silver rose 0.71pc to $69.75 an ounce.
