- Markets choppy after Fed rate warnings
- Most inverted U.S. yield curve since 1981
- The dollar is selling again, but off the lows of the week
SYDNEY, Nov 18 (Reuters) – Asian stocks were in a cautious mood on Friday after U.S. Federal Reserve officials fired more warning shots on interest rates amid rising coronavirus cases in China and tensions over liquidity in its bond market added to the uncertainty.
Both the dollar and bond yields rose overnight as St. Louis Fed President James Bullard said interest rates may need to reach a range of 5-5.25% to be “sufficiently restrictive” to curb inflation.
It was a blow to investors who had bet rates would peak at 5% and saw fed funds futures sell off as markets priced higher odds of rates now hitting 5-5.25 %, rather than 4.75-5.0%.
Two-year yields rallied to 4.46%, somewhat retracing last week’s steep 33 basis point inflation-driven decline to a low of 4.29%. That left them 69 basis points above 10-year yields, the biggest reversal since 1981.
“The message is about the Fed’s desire to oppose what it would view as a premature easing of financial conditions,” said NatWest Markets analyst Brian Daingerfield. “And on this front, message received.
“The Fed seems squarely focused on oversignaling on the tightening front and is hoping the data will slow to a point where it can have the flexibility to undervalue.”
The bond market recession warnings weren’t exactly what Wall Street wanted to hear and they left S&P 500 futures unchanged, while Nasdaq futures rose 0.1%.
EUROSTOXX 50 futures added 0.7% and FTSE futures added 0.3%.
MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) rebounded 0.5%, after slipping for two sessions.
Chinese blue chips (.CSI300) were flat amid reports that Beijing had asked banks to check bond market liquidity after soaring yields caused losses for some investors.
There were also fears that a rise in COVID-19 cases in China could jeopardize plans to ease tough movement restrictions that have strangled the economy.
BOJ NOT TO TURN
The Japanese Nikkei (.N225) rose 0.1% as data showed inflation hit a 40-year high as yen weakness fueled import costs.
Yet the Bank of Japan argues that inflation is mainly due to energy costs beyond its control and that the economy needs continued ultra-easy policies.
The situation was starkly different in Britain, where Finance Minister Jeremy Hunt had just announced tax hikes and spending cuts in a bid to reassure markets that the government was serious about tackling inflation.
On bleak predictions that the economy was already in recession, sterling stood at $1.1916, off the week’s high of $1.2026.
After rebounding overnight, the dollar itself saw further selling and retreated to 106.460 on a basket of currencies, heading back to a three-month low of 105.30 hit early in the week. The dollar also fell slightly from 139.78 yen, but held above its recent low of 137.67.
The euro held steady at $1.0376, after hitting a four-month high of $1.0481 hit on Tuesday as some policymakers urged caution on tightening.
ECB President Christine Lagarde will deliver a keynote speech later Friday that could offer some hints about where the majority of the bank might go.
In commodities markets, the rebound in the dollar and yields left gold at $1,762 an ounce and a high of $1,786 hit at the start of the week.
Oil futures rallied on Friday, but still suffered steep losses for the week on worries about Chinese demand and ever-higher U.S. interest rates.
Brent crude added 79 cents to $90.57, down 5.5% on the week, while U.S. crude rose 92 cents to $82.56 a barrel.
(This story has been reclassified to correct paragraph two to 5-5.25% from 5-7%)
Reporting by Wayne Cole; Editing by Bradley Perrett and Sam Holmes
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