A global stock market index fell as short-term US Treasury yields jumped on Friday after Federal Reserve Chairman Jerome Powell said the US economy will need tight monetary policy “for a while” before inflation is under control. The dollar erased early losses to turn positive against a basket of currencies, while gold, which is losing its appeal as interest rates rise, fell after Powell’s comments.
Tight monetary policy “for a while” means slower growth, a weaker job market and “some pain” for households and businesses, Powell said in a speech at the central bank conference in Jackson. Hole, Wyoming. “Reducing inflation will likely require an extended period of below-trend growth. In addition, there will most likely be an easing in labor market conditions,” Powell said.
He did not hint at what the Fed might do at its next policy meeting on September 20-21. The authorities should approve a rate increase of 50 or 75 basis points. Interest rate futures tied to Fed policy expectations fell on Friday moments after Powell’s speech, reflecting heightened odds of a third straight 75 basis point rate hike in the next Fed meeting.
“It was hawkish as expected. Powell’s message is clear: the Fed is far from done in its fight against inflation,” said Antoine Bouvet, senior rates strategist at ING in London. The MSCI gauge of stocks across the world lost 1.68%.
Major Wall Street indexes tumbled, with Powell’s comments sending megacap growth and tech stocks plummeting. “His comments were hawkish. He’s keeping the pedal to the metal here when it comes to inflation-fighting policy,” said Lindsey Bell, chief money and markets strategist at Ally.
The Dow Jones Industrial Average fell 625.94 points, or 1.88%, to 32,665.84, the S&P 500 lost 91.95 points, or 2.19%, to 4,107.17 and the Nasdaq Composite fell 337.22 points, or 2.67%, to 12,302.05. European stocks fell as investors worried about negative data on German consumer sentiment due to rising energy costs.
Consumer sentiment in the two biggest eurozone economies diverged sharply in August as French consumers benefited from new government measures while worries about rising energy bills hit their German counterparts, surveys showed on Friday. . The pan-European STOXX 600 index lost 1.68%.
Two-year US Treasury yields briefly hit their highest levels since October 2007 before stabilizing near two-month highs after Powell’s comments. The two-year US Treasury yield, which generally moves in line with interest rate expectations, rose 4.7 basis points to 3.4211%, slightly below its 2022 high of 3 .4350% in June.
The yield on the 10-year Treasury note rose about 2 basis points to 3.0409%. Rising short-term rates have prolonged the inversion of the yield curve, which is widely seen as a signal of a coming recession. The closely watched spread between two- and 10-year Treasury yields was -37 basis points, down from -31.3 basis points before Powell’s speech.
In the currency markets, the dollar erased early losses against a basket of currencies on Powell’s remarks to trade up 0.18% to 108.68. The euro edged up 0.02% following a Reuters report that some European Central Bank policymakers want to discuss a 75 basis point interest rate hike at the meeting. September policy statement, although recessionary risks loom as the inflation outlook deteriorates.
Oil prices were little changed during the day in a choppy session as talk of a big ECB rate hike stoked demand concerns. Brent crude futures rose $0.24, or 0.24%, to $99.58 a barrel. U.S. West Texas Intermediate (WTI) crude futures rose $0.06, or 0.06%, to $92.58.
Spot gold was at $1,736.29 an ounce, down 1.26%.
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