Stocks stagnate as U.S. rates rise for longer. After the U.S. Federal Reserve decided not to raise interest rates for the first time in 17 months, Asian markets paused near two-month highs, and the currency fell.
Chair Jerome Powell said the Fed needed more economic data to decide what to do next.
Short-term U.S. yields rose as committee members forecast two more 25 basis point raises this year, ending bets on 2023 cuts.
After the decision, the euro reached a one-month high of $1.0865 and is now at $1.0826, awaiting a European Central Bank meeting later in the day where markets predict an eighth straight rate hike to push borrowing prices to two-decade highs.
S&P 500 (.SPX) futures fell 0.1% overnight. MSCI’s broadest Asia-Pacific share index outside Japan (.MIAPJ0000PUS) climbed 0.2%, while Japan’s tearaway Nikkei (.N225) halted for breath and was flat.
“The two projected hikes were viewed as hawkish initially,” said Steve Englander, head of G10 currency research at Standard Chartered in New York, but traders unwound that when Powell struck a balanced tone in his press conference.
“The market takeaway was that rates would stay high for longer, rather than spike upwards in line with the shift in projected Fed funds rate.”
Two-year Treasury rates rose 13.5 bps before closing at 4.69%. Ten-year rates declined three bps to 3.79%.
Fed funds futures prices didn’t change, but traders raised forecasts for a boost next month and pushed cuts until 2024.
“The conditions we need to see… to get inflation down are coming,” Powell said. “But the process of that actually working on inflation is going to take some time.”
CHINA SLOWDOWN
China’s industrial output and retail sales missed market expectations, signaling the economic recovery is faltering.
China slashed its benchmark medium-term loan rates by ten bps, sending the yuan to a six-month low of 7.1783 per dollar.
“Expectations are building that additional stimulus will come from Beijing and this could be the much needed catalyst for the Chinese market to overcome a disappointing first half,” said Tai Hui, Asia-Pacific head strategist at J.P. Morgan Asset Management.
Strong Australian jobs data supported the Aussie dollar, which was stable at $0.6786, while the New Zealand currency fell as data revealed the country slid into recession this year.
The kiwi fell 0.7% to $0.6163, indicating an end to rate hikes.
The euro has been rising against the dollar for two weeks on signals of slower U.S. inflation and a cooling labor market. The ECB meets later in the day. Expect a 25-bp rise.
In May, Japan’s exports unexpectedly climbed, but slowly. Before a Friday Bank of Japan meeting, the yen fell 0.5% to 140.74 per dollar.
Brent crude prices fell 0.16% to $73.08. Gold, which provides no income, fell to a two-week low of $1,934 an ounce due to predictions of increased U.S. interest rates.
Bitcoin lost 3% overnight to $25,049.
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