- European stocks fall after an early rally
- The dollar is regaining strength on the back of hawkish Fed talk
- Oil and metals declined in commodity markets
NEW YORK/LONDON (Reuters) – The dollar rose and stock markets fell on Thursday after more hawkish comments from Federal Reserve officials reminded investors that less aggressive monetary policy was unlikely as US employment data continued to show a tightening labor market.
Ongoing recession and concerns about interest rates rattled European markets, while sterling fell as Britain hoped to put its recent disastrous financial experience behind it with an even tighter budget.
Early optimism in Europe about Siemens earnings and that the European Central Bank may soon slow rate hikes led to more selling, which was followed on Wall Street by renewed talk from Fed officials that rates are not high enough.
James Bullard, president of the Federal Reserve Bank of St. Louis, said the US central bank needs to continue raising interest rates by at least another full percentage point, since the hikes so far have “had only limited effects on observed inflation.”
Using “cautious” assumptions, Bullard said at an economics event in Louisville, Kentucky, that the basic monetary-policy rule required rates to rise to at least 5%, while the more stringent assumptions would recommend rates above 7%.
Market expectations for the Fed’s final interest rate peak have risen to near 5% in May and June after tough talk from Bullard and other Fed officials this week.
“The narrative has quickly shifted to a more moderate path for inflation next year and what will happen if there is a significant slowdown in growth and a recession,” said Subhadra Rajappa, head of US interest rate strategy at Societe Generale in New York.
Jobless claims data showed US jobless claims fell last week, indicating that the labor market remains tight despite the Federal Reserve raising interest rates to cool demand.
Expectations of higher interest rates boosted the dollar and weakened other currencies. The dollar fell 3.7% last week when US consumer inflation data for October came in less than expected and raised hope that the Federal Reserve may hold off on raising interest rates.
The euro fell 0.61% to $1.0329, and the yen fell 0.74% against the dollar, to 140.57.
The pound fell $1.1779, or 1.08%, the next day after the new British government presented a new budget plan worth £55 billion ($64.93 billion) in tax increases and spending cuts.
DoubleLine portfolio manager Bill Campbell said the rebound in the pound over the past month means budget headlines may have already been priced in, and that Britain’s experience may be mirroring elsewhere, especially with looming recessions and an ongoing energy crisis.
“The Fed’s commentary, like its flexible spending numbers, gave little succor to anyone looking for an imminent pivot,” Ted Nugent, an economist at the National Australia Bank, wrote in a note to a client, with markets penetrating cautiously as a result.
Concerns about the economic outlook have caused the Treasury yield curve to invert sharply, indicating that investors are preparing for a recession.
The 2-year/10-year spread closed below -60 basis points for the first time since 1982, Jim Reed of Deutsche Bank said, “which is troubling when you consider its historical accuracy as a leading predictor of recessions.”
The gap between yields on the 2- and 10-year Treasury notes, which is seen as a harbinger of a recession, was at -69.8 basis points.
The yield on the benchmark 10-year note increased by 9.6 basis points, to 3.790%.
US crude recently fell 3.19% to $82.86 a barrel, and Brent crude reached $90.92, down 2.09% on the day.
Nickel, copper, and tin fell significantly, although industrial metals took a hit. Spot gold fell 0.9 percent to $1,758.45 an ounce.
Additional reporting by Herbert Lash and Mark Jones in London and Kevin Buckland in Tokyo. Editing by Bernadette Baum and Kirsten Donovan
Our standards: Thomson Reuters Trust Principles.