Stocks, Bonds Rise as Fed Tightening Bets Cut Back: Markets Wrap
- Fed raised rates a half point and signaled similar moves ahead
- Yields, dollar lower after Powell damped 75 basis-points talk
Stocks rose and bonds jumped Thursday amid a bout of investor relief after the Federal Reserve raised interest rates as expected while countering fears of super-sized hikes.
An Asian share gauge was up about 1%, helped by Hong Kong and China, where there are hopes for steps to support an economy sapped by Covid lockdowns.
U.S. futures steadied, and European contracts added more than 2%, following a 3% advance in the S&P 500 index that ranked as the biggest since 2020. The dollar remained lower after retreating in the Fed’s slipstream.
Australian debt surged in the wake of a pronounced slump in shorter-maturity Treasury yields as traders scaled back bets on aggressive monetary tightening. There’s no cash Treasuries trading in Asia due to a Japan holiday.
Fed Chair Jerome Powell said a 75 basis points hike is “not something that the committee is actively considering,” spurring the market rally. The Fed raised rates a half point and signaled similar moves for the next couple of meetings.
“Removing some of the uncertainty is helpful in getting some of the cash that has been on the sideline back into the markets, whether it’s bonds or equities,” Erin Gibbs, chief investment officer at Main Street Asset Management LLC, said on Bloomberg Television.
The U.S. central bank will also allow its holdings of Treasuries and mortgage-backed securities to decline in June at an initial combined monthly pace of $47.5 billion, stepping up over three months to $95 billion.
The market reaction is likely to evolve as investors digest Powell’s commentary. A global wave of monetary tightening alongside commodity-fueled price pressures could yet hurt economic growth. Russia is also continuing its war in Ukraine and China’s Covid curbs are snarling global supply chains.
Climbs in oil and wheat underlined the risks. Crude hit $108 a barrel on a European Union plan to ban Russian barrels over the next six months. Wheat rose on the possibility of export curbs by major grower India.
‘Too Optimistic’
“The market is way too optimistic about the Fed’s ability to tame inflation,” Nancy Davis, chief investment officer at Quadratic Capital Management LLC, wrote in a note. “We may be facing a stagflation environment.”
Swaps linked to Fed meetings are now pricing in less than 150 basis points of further rate increases over the June, July and September decisions. That hints at doubts about the scope for another three hikes of 50 basis points apiece.
Gold rose 1% amid the drop in yields and cooling policy-tightening expectations. That dynamic also allowed Bitcoin to hold a climb toward $40,000.
In Europe, the Bank of England is expected to raise rates to their highest level in 13 years and clarify how it plans sell off some of its 847 billion pounds ($1.1 trillion) in government bond holdings.