US stocks and government bond prices rebounded after five consecutive days of declines on Wednesday following the Federal Reserve’s announcement that it would raise interest rates by the most in nearly 30 years in an attempt to combat stubbornly high inflation.
The US central bank said it would lift the federal funds rate 0.75 percentage points from its target range of 0.75 per cent to 1 per cent. The increase was the first move of such magnitude since 1994.
Stocks whipsawed throughout the afternoon but settled higher as investors focused on Fed chair Jay Powell’s assertion that such large rate rises would not become common.
The S&P 500 index swung between a 0.4 per cent loss and a 2.7 per cent gain before closing 1.5 per cent higher for the day, slightly ahead of where it was trading before the Fed’s announcement. The tech-dominated Nasdaq Composite jumped 2.5 per cent.
Japanese and South Korean equities jumped the most in Asia on Thursday, with the Topix and Kospi up as much as 2 per cent and 2.2 per cent, respectively.
Hong Kong’s Hang Seng index fell by as much as 0.7 per cent after opening higher, while China’s CSI 300 fluctuated with gains of as much as 0.5 per cent.
European futures pointed to a positive start, with contracts for the Euro Stoxx 50 up 0.7 per cent and for the FTSE 100 up 0.2 per cent.
Stock and bond markets had sold off sharply since the release of unexpectedly high inflation figures last week, raising the prospect of the Fed’s more aggressive approach. The previous five sessions marked the S&P’s worst five-day run since the start of the coronavirus pandemic.
Powell said he expected the central bank to consider a further 0.5 per cent or 0.75 per cent increase at its next policy meeting in July, at which point interest rates would be close to “more normal” levels that do not stimulate economic activity.
Ben Jeffery, US rates strategist at BMO Capital Markets, said Powell’s comments were an “attempt to walk a tightrope between committing to combating inflation but not over-tightening”.
But despite the short-term rally, some traders warned that Powell’s comments risked leaving the Fed with less room to manoeuvre if inflation continued to rise unexpectedly.
Michael de Pass, head of linear rates at Citadel Securities, said: “Saying that [0.75 percentage point increases] aren’t going to be common takes away some optionality and reduces the scope of the Fed’s reaction function.
“The point of raising rates is to slow aggregate demand and tighten financial conditions. The opposite has happened today.”
The yield on the benchmark 10-year Treasury note, which hit an 11-year high this week, dipped 0.18 percentage points to 3.30 per cent. Yields fall when prices rise.
The Fed’s hotly anticipated announcement followed an unexpectedly busy day of monetary policy activity in Europe, as the European Central Bank held an unscheduled meeting to counter concerns about the effect of surging borrowing costs on the weakest eurozone economies.
The ECB said it would speed up work on a new “anti-fragmentation instrument” to combat the widening gap in borrowing costs between Germany and economies with more fragile balance sheets such as Italy.
The central bank also pledged to “apply flexibility” in the way it reinvests the proceeds of bonds bought under its pandemic emergency purchase scheme, which could allow it to buy more bonds from vulnerable governments.
The Stoxx Europe 600 index added 1.4 per cent, with its banking sub-index gaining 2.5 per cent. Intesa Sanpaolo and UniCredit, two leading Italian banks, advanced 4.6 per cent and 3.7 per cent respectively.
The yield on Italy’s 10-year bond, which influences government and consumer borrowing costs in the debt-laden country, fell 0.37 percentage points to 3.8 per cent — down from Tuesday’s high of about 4.2 per cent.
Concerns about weaker economies in the eurozone have intensified since the ECB confirmed that it stood ready to raise interest rates in its first such move since 2011.
“There are concerns about this notion of fragmentation as you get different monetary policy outcomes in different countries in the eurozone,” said Edward Park, chief investment officer at Brooks Macdonald.
The gap between Italy and Germany’s 10-year bond yields, a gauge of financial stress in the single-currency bloc, stood at 2.17 percentage points after the ECB statement, down from 2.41 percentage points in the previous session.
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June 16, 2022 at 11:58AM
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US stocks close higher after Federal Reserve raises interest rates - Financial Times
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