Global stock markets reel from recession, Fed rate hike bets

BLOOMBERG

Global stock markets struggled on Wednesday, after comments from Federal Reserve Chair Jerome Powell boosted interest rate wagers, drove up Treasury bond yields and revived fears that the world’s largest economy will not be able to dodge a recession.
Europe’s Stoxx 600 equity benchmark slipped about 0.2%, following a weak Asian session, though US equity futures turned marginally positive, after the underlying S&P 500 and Nasdaq indexes posted their biggest losses in two weeks. As the dollar extended the previous day’s 1% gain, oil prices fell further, adding to Tuesday’s 3.6% drop.
Money markets are now pricing US interest rates rising above 5.6% later this year after Powell signalled readiness to speed up policy tightening, should inflation keep running hot. That lifted the rate-sensitive two-year Treasury yield past 5% for the first time since 2007, raising its premium over 10-year rates to a full percentage point for the first time since 1981, a level which according to Deutsche Bank strategists signals recession within a maximum eight months.
“We would be foolhardy to expect we can’t reach 6% on Fed rates, and clearly that has an impact on asset markets across the globe,” Rabobank strategist Jane Foley told Bloomberg Television. If the Fed has to work harder to get inflation down, “that certainly does imply recession,” she added.
This so-called curve inversion deepened further on Wednesday to reach 107.9 basis points, as chances grew of a 50 basis-point move at the Fed’s March 21-22 meeting and analysts at Goldman Sachs added a July Fed hike to their forecasts.
Rates are repricing higher elsewhere too, with wagers on the Bank of England rising to 5% on Wednesday, while an additional 150 basis points of tightening priced from the European Central Bank.
The pain is hitting emerging markets, with MSCI’s emerging equity gauge losing 1.6%.
Rabobank’s Foley predicted that dollar strength — it is close to its highest levels for this year — would filter through to emerging economies, which could find themselves having to tighten policy further. “That leads to the impression global growth will also be slowing,” she said.
Payroll growth has topped estimates for 10 straight months in the longest streak in decades, a trend that, if extended, will boost pressure on the Fed to keep raising interest rates. S&P 500 futures were little changed as of 4:46 am New York time and Nasdaq 100 futures were little changed.
While futures on the Dow Jones Industrial Average were little changed, the Stoxx Europe 600 fell 0.3% and the MSCI World index fell 0.3%. The S&P 500 futures were little changed and the Nasdaq 100 futures were little changed. The MSCI Asia Pacific Index fell 1% and the MSCI Emerging Markets Index also drops 1.3%.
While the Bloomberg Dollar Spot Index was little changed, the euro was little changed at $1.0545 and the British pound was little changed at $1.1838. The Japanese yen fell 0.3% to 137.53 per dollar and the offshore yuan rose 0.2% to 6.9778 per dollar.