US stocks and bonds fall as traders weigh the direction of monetary policy
US stocks and bonds reversed gains from the previous session, as the slight drop following the Federal Reserve’s latest interest rate decision was overshadowed by concerns about the monetary policy outlook.
The S&P 500 index fell 2.4%, after closing 3% higher on Wednesday in the stock benchmark’s best one-day performance since May 2020. The tech-heavy Nasdaq Composite fell 3, 3%.
The US central bank on Wednesday announced its first rate hike of 0.5 percentage points in more than 20 years, in a highly publicized move, while Fed Chairman Jay Powell also appeared to excludes a 0.75 percentage point increase in the upcoming meetings.
Trevor Greetham, head of multi-assets at Royal London, referred to Wednesday’s moves.
“But you still have a bad scenario where central banks are not your friends,” he added. “What really needs to change for sustained improvement in market conditions is inflation,” which hit a 40-year high of 8.5% in March.
The S&P Index is down more than a tenth so far this year as the prospect of higher borrowing costs and persistently high inflation threaten corporate profits. The tech-focused Nasdaq Composite is down 20%.
The yield on the 10-year U.S. Treasury note, which is used by investors as a yardstick to value many other financial assets, rose 0.13 percentage points to 3.04%. Yields on Treasuries, which tend to be inversely priced, have fluctuated wildly in recent weeks as the uncertain paths of inflation and interest rates complicate the case for investing in fixed-income securities. determined.
Powell said Wednesday that a neutral monetary policy stance, which neither accelerates nor slows the economy, “isn’t something that we can pinpoint.”
The Fed chair also “seems very determined to raise rates until he sees progress on inflation,” said Rose Ouahba, head of fixed income at Carmignac. “And [he] does not say where the Fed needs to stop.”
The dollar index, which measures the US currency against six other currencies, gained 0.9 percent, holding near a 20-year high.
In the UK, the pound fell as much as 2.1% against the dollar to just under $1.24, its weakest since mid-2020, after the Bank of England said the country’s economy This country may fall into recession this year.
Central Bank of Great Britain increase its main borrowing rate on Thursday rose a quarter point to 1%, marking the fourth straight gain, but also forecasting inflation to exceed 10%.
“This is really the sum total of all our fears” about the UK economy, said Roger Lee, head of UK equity strategy at Investec. “Growth projections have been downgraded, inflation expectations have been upgraded and interest rates are continuing to rise.”
UK gilts recovered as traders speculated the BoE will keep borrowing costs relatively low to protect the economy. The two-year gold-plated yield, which tracks monetary policy expectations, fell 0.13 percentage points to 1.52 percent. The 10-year gilding yield decreased by 0.05 percentage points to 1.92%.
In Europe, the regional Stoxx 600 share index fell 0.1%. The UK’s FTSE 100, which ranks alongside exporters whose reported revenue was boosted by a weaker pound, rose 0.8%.