Federal Reserve signals prolonged higher interest rates, markets react

On Thursday, both stocks and treasuries experienced a decline, while the dollar strengthened. This shift came in response to the Federal Reserve’s indication that interest rates would remain elevated for an extended period.

European equity futures saw a decrease of approximately 1%, mirroring a slip in contracts for US benchmarks. This extended the losses observed on Wall Street the previous Wednesday. Across Asia, benchmarks displayed a similar trend, with the MSCI China Index on track for its lowest closing level since November, reflecting persistent pessimism regarding the nation’s economic recovery.

Tech stocks in Hong Kong suffered a decline of over 2%, echoing the substantial sell-off observed in US tech companies on Wednesday. On a positive note, China’s struggling property developers saw an uptick in value following the implementation of new measures aimed at easing home-buying regulations.

Treasury yields saw a slight increase, building upon the rise observed on Wednesday when the two-year yield, particularly sensitive to imminent Fed actions, reached its highest point since 2006.

The dollar surged against major currencies, maintaining its level against the yen, which traded around 148 per dollar after experiencing a decline on Wednesday to its lowest point since November.

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The Federal Reserve maintained its target range, with updated quarterly projections indicating that most officials leaned towards another rate hike in 2023. Additionally, policymakers anticipate a reduction in easing measures next year, with the median forecast for the federal funds rate projected to reach 5.1% by year-end, up from 4.6% in the June update.

The pound weakened in anticipation of Thursday’s Bank of England policy decision. Following an unexpected slowdown in UK inflation, traders scaled back their expectations for further tightening measures by the central bank. The market is currently pricing in a 50% likelihood of a quarter-point hike on Thursday. Furthermore, there is a belief that if the BOE does enact a hike, it will be the last one. Goldman Sachs and Nomura even went so far as to assert that rates have already reached their peak. Bloomberg Economics, however, anticipates an increase.

Central banks in the Philippines and Indonesia are also slated to announce policy decisions on Thursday. The Philippine central bank is likely to raise rates by a quarter point, while Indonesian policymakers are expected to maintain rates, according to Bloomberg Economics.

The series of policy meetings this week will conclude with the Bank of Japan’s meeting on Friday.

In other news, the rapid surge in oil prices is taking a pause. This is attributed to a smaller-than-anticipated decrease in US crude stockpiles, which has reinforced technical resistance to further gains. As a result, West Texas Intermediate’s futures dropped below $90 a barrel.