NEW YORK, March 22 (Reuters) – U.S. stocks fell from near two-week highs on Wednesday after Federal Reserve Chair Jerome Powell reaffirmed his commitment to curb inflation, despite the Fed signaling it would be more cautious amid the recent turmoil future rate hikes could soon disrupt financial markets.
As expected by many investors, the Fed hiked rates by 25 basis points and failed to say in its most recent policy statement that a “sustained hike” in rates is likely to be appropriate.
Markets initially took the omission as a sign that interest rates might peak, sending Treasury yields to session lows after the Fed’s statement was released.
However, in his press conference, Powell reiterated his desire to tame inflation, saying the Fed will do “enough” to bring inflation down to 2% and will raise rates higher if necessary.
The hawkish note drove US stocks lower. The Dow Jones Industrial Average (.DJI) fell 1.63%, the S&P 500 (.SPX) fell 1.64% and the Nasdaq Composite Index (.IXIC) fell back to end down 1.6%.
“Should tensions in the financial system ease in the near term, we cannot rule out that stronger macro data will prompt the Fed to hike rates further beyond May,” said Michael Gapen, economist at Bank of America Securities.
“But for now, we believe the risks are towards an earlier end to the tightening cycle.”
Treasury investors seemed to agree.
The two-year yield, which coincides with traders’ expectations for a less hawkish Fed, fell to 3.9597% from 4.177% on Tuesday. The benchmark 10-year Treasury yield fell to 3.4509% from 3.606% on Tuesday.
Global markets have been thrown into chaos over the past two weeks after the sudden collapse of US lenders Silicon Valley Bank (SIVB.O) and Signature Bank (SBNY.O) and a fire sale by ailing Swiss banking giant Credit Suisse (CSGN). S).
Efforts by regulators and policymakers around the world to counter the shocks in the banking sector have helped contain contagion and stock market defeat, although many investors fear other smaller lenders could be next in line as credit markets strengthen.
Fed QT in question?
CONTINUED INFLATION
[1/8] Federal Reserve Chairman Jerome Powell is seen making remarks on a screen on the floor of the New York Stock Exchange (NYSE) in New York City, the United States, on March 22, 2023. REUTERS/Brendan McDermid
The Fed’s signal that it may pause its tightening cycle comes as price pressures remain persistent despite months of rate hikes.
The data also showed that UK inflation unexpectedly rose to 10.4% in February, raising expectations for a quarter-point rate hike at Thursday’s Bank of England meeting and boosting sterling.
European bonds joined the ride. Overnight, German two-year yields posted their largest daily jump since 2008 as markets resumed pricing in more ECB hikes.
The euro, meanwhile, hit a near seven-week high at $1.0940, while sterling rose as much as 0.5% to $1.2274 following UK inflation data.
The dollar index fell on the dovish Fed’s note, shedding 0.62% and a weaker dollar pushed the yen higher to 131.39.
HOT SPOTS
Markets, unsettled by the turmoil in the banking sector, remained alert to signs of stress elsewhere.
The upheaval sparked by the collapse of Silicon Valley Bank is not over yet, and a significant number of banks will fail within two years, hedge fund Man Group CEO Luke Ellis (EMG.L) said on Wednesday a conference in London.
“I think in 12 to 24 months we’re going to have significantly more banks that don’t exist,” Ellis said, adding that he thinks smaller and regional banks in the United States and challenger banks in the UK could be at risk.
First Republic Bank (FRC.N) was also in focus after efforts to raise capital continued unsuccessfully on Tuesday. The stock fell 15.5% late Wednesday after Treasury Secretary Janet Yellen said there was no discussion about insuring all deposits.
“The banking crisis is leading to tighter credit conditions and when you tighten conditions you weaken economic activity, which puts more pressure on the banking sector,” Prime Partners’ Savary said. “I don’t think the banking crisis is over.”
A weaker dollar also boosted oil prices. Brent crude was up $1.37, or 1.8%, to $76.69 a barrel, while US crude was up $1.23, or 1.8%, at $70.90.
Gold, which benefited from safe-haven funds seeking refuge from the banking crisis, rose on Wednesday as some investors took heed of the Fed’s signal that interest rates could peak for now. Gold performs well in a low interest rate environment as it does not pay interest.
Spot gold prices rose 1.41% to $1,967.53 an ounce.
Reporting by Dhara Ranasinghe; Additional reporting by Wayne Cole in Sydney, editing by Alison Williams, William Maclean, Marguerita Choy and Diane Craft
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