Global stocks and government bond yields rose on Thursday after the European Central Bank raised interest rates by a record 75 basis points and Federal Reserve Chairman Jerome Powell said that the US central bank was “strongly determined” to control inflation. The ECB also signaled further hikes to fight inflation, even as the bloc’s economy heads into a likely winter recession.
Eurozone government bond yields jumped on the wake of news from the ECB. Benchmark 10-year Treasury yields rose on Powell’s remarks and last stood at 3.32%. US 10-year yields rose from a four-month low of 2.516% on August 2, but are still below the 11-year high of 3.498% hit on June 14. Two-year yields rose four basis points to 3.491%.
In currencies, the dollar gained against the yen on Powell’s hawkish stance, while the pound fell against the dollar after the death of Queen Elizabeth, Britain’s longest-reigning monarch and figure leader of the nation for seven decades. At a Cato Institute lecture, Powell also said inflation could be controlled without the “very high social costs” previously involved.
Fears that central banks will remain hawkish and inflation will remain persistently high have driven government bond yields globally higher in recent weeks. Shares on Wall Street initially fell on his remarks, but then reversed course to end with strong gains, helped by shares of rate-sensitive banks and healthcare companies. The S&P 500 banking index jumped 2.8%.
“It’s been a volatile session. But the key point is that we’re holding on to yesterday’s gains instead of the ECB raising rates by 75bps and obviously taking a very hawkish stance on tackling the inflation, and we heard the same (hawkish) comment from Mr. Powell this morning,” said Peter Cardillo, chief market economist at Spartan Capital Securities in New York. “There was nothing new” in the Powell’s comments, he said. “It’s a known fact that central banks cause a global recession. The question is whether it will be strong or soft. I guess it will be sweet.”
The Dow Jones Industrial Average rose 193.24 points, or 0.61%, to 31,774.52, the S&P 500 gained 26.31 points, or 0.66%, to 4,006.18 and the Nasdaq Composite added 70.23 points, or 0.6%, to 11,862.13. Banks also drove European stocks higher. The pan-European STOXX 600 index rose 0.50% and the MSCI gauge of stocks across the world gained 0.76%.
Chicago Fed Chairman Charles Evans also said on Thursday that bringing down high inflation was the “first task” and that to do this the Fed could raise interest rates by 75 basis points. more this month. Fed officials are heading for a blackout period ahead of their September 20-21 meeting, when they are expected to hike the fed funds rate another 75 basis points from 3.0% to 3, 25%.
“It’s important to remember the lesson we all learned years ago, and that’s not to fight the Fed,” said Oliver Pursche, senior vice president at Wealthspire Advisors in New York. “And the Fed tells us that it is focused on inflation.” In afternoon trade in New York, the dollar rose 0.1% to 143.96 yen, climbing in nine of the past 10 sessions. On Tuesday, it hit a 24-year high of 144.99 yen.
The euro fell 0.1% to $0.9994. The yen fell victim to the recent strength of the dollar, with the Bank of Japan remaining the only accommodating central bank.
The pound last traded at $1.1502, roughly flat on the day. Crude prices edged up about 1% after falling to a seven-month low in the previous session.
Brent crude futures rose $1.15, or 1.3%, to settle at $89.15 a barrel, while U.S. crude West Texas Intermediate (WTI) CLc1 rose 1. $60, or 2.0%, to settle at $83.54. (Additional reporting by Marc Jones in London and Stephen Culp and Karen Brettell in New York; Editing by Mark Porter, Richard Chang and Josie Kao)
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