World stocks were headed for a 1% loss for the week on Friday, retreating from recent two-month highs after US Federal Reserve officials fired more warning shots on interest rates, while the US bond yield curve was pricing in a recession.
The dollar and bond yields climbed after St. Louis Fed President James Bullard suggested interest rates may need to rise to 5-5.25 percent from their present level of slightly below 4 percent to be “sufficiently restrictive” in order to keep inflation at bay.
This was a setback for investors who had expected rates to peak at 5%, and Fed fund futures fell as markets priced in a higher probability that rates would now peak at 5-5.25 percent, rather than 4.75-5 percent.
“The Fed has fought back against the market narrative through their remarks – we are not going to see a shift,” said Arun Sai, senior multi-asset strategist at Pictet Asset Management.
The stock market is currently “running on fumes,” according to Sai, and the focus will shift to the real economy’s response to rising rates, such as anecdotal signals of a downturn in the US labor market.
The MSCI world equity index rose 0.17 percent, while S&P futures in the United States remained unchanged after the S&P 500 index fell 0.3 percent on Thursday.
European stock rose 0.54 percent, with banks surging over 1%, as the European Central Bank prepares to begin the largest cash withdrawal from the eurozone’s banking system in history.
Banks will repay around 500 billion euros in Targeted Longer-Term Refinancing Operations (TLTRO) loans. The ECB’s statement is scheduled for 11:05 a.m. GMT.
The FTSE 100 rose 0.33 percent on Monday, a day after Finance Minister Jeremy Hunt announced tax increases and spending cuts in an effort to convince markets that the government was serious about combating inflation.
British retail sales recovered only somewhat last month after shops closed in September for Queen Elizabeth’s burial, according to figures released on Friday, and they remained below pre-pandemic levels as soaring inflation eroded buying power.
“Although the Bank of England is expected to continue rising rates despite a slowing economy,” said Dean Turner, chief eurozone and UK economist at UBS Global Wealth Management.
Two-year rates in the United States moved back up to 4.48 percent, reversing some of last week’s steep inflation-driven decline of 33 basis points to a low of 4.29 percent.
This put them 69 basis points higher than 10-year rates, the greatest inversion since 1981 and a sign of an oncoming recession.
Nonetheless, the Bank of Japan maintains that inflation is mostly driven by energy costs outside its control and that the economy requires ongoing ultra-easy policies.
Brent crude fell to four-week lows on concerns about declining Chinese demand and future Fed rate hikes.
Brent crude fell 0.2 percent to $89.51 a barrel. The price of US crude oil remained stable at $81.67 per barrel.
Gold rose 0.1 percent to $1,763 per ounce, having achieved a three-month high of $1,786 earlier in the week.
The dollar remained unchanged at 106.65 against a basket of currencies, having hit a three-month low of 105.30 earlier in the week.
The US dollar maintained steady at 140.23 yen, remaining above its recent low of 137.67. The pound gained 0.3 percent to $1.1904.
The euro remained at $1.0357, down from a four-month high of $1.0481 reached on Tuesday, as several policymakers called for caution in tightening.
Later on Friday, ECB President Christine Lagarde will deliver a keynote speech that may provide insight into which way the bank’s majority may go.
MSCI’s broadest index of Asia-Pacific stock outside of Japan remained stable.
Chinese blue chips fell 0.45 percent on news that Beijing has urged banks to monitor bond market liquidity after surging yields triggered losses for certain investors.
There were also concerns that an increase in COVID-19 cases in China might jeopardize promises to relax severe travel restrictions that have stifled the economy.
The Nikkei 225 index in Japan fell 0.1 percent as statistics showed inflation at a 40-year high due to a weak yen, which increased import costs.
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