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.<\/p>\n
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.<\/p>\n
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.<\/p>\n
“The Fed has fought back against the market narrative through their remarks \u2013 we are not going to see a shift,”<\/em> said Arun Sai, senior multi-asset strategist at Pictet Asset Management.<\/p>\n 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.<\/p>\n 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<\/a> fell 0.3 percent on Thursday.<\/p>\n 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.<\/p>\n Banks will repay around 500 billion euros in Targeted Longer-Term Refinancing Operations (TLTRO<\/a>) loans. The ECB’s statement is scheduled for 11:05 a.m. GMT.<\/p>\n 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.<\/p>\n 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.<\/p>\n “Although the Bank of England is expected to continue rising rates despite a slowing economy,”<\/em> said Dean Turner, chief eurozone and UK economist at UBS Global Wealth Management.<\/p>\n 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.<\/p>\n This put them 69 basis points higher than 10-year rates, the greatest inversion since 1981 and a sign of an oncoming recession.<\/p>\n 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.<\/p>\n Brent crude fell to four-week lows on concerns about declining Chinese demand and future Fed rate hikes.<\/strong><\/p>\n Brent crude fell 0.2 percent to $89.51 a barrel. The price of US crude oil remained stable at $81.67 per barrel.<\/p>\n Gold rose 0.1 percent to $1,763 per ounce, having achieved a three-month high of $1,786 earlier in the week.<\/p>\n 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n MSCI’s broadest index of Asia-Pacific stock outside of Japan remained stable.<\/strong><\/p>\n 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.<\/p>\n 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.<\/p>\n