Futures are now pricing in around a 64% chance the Fed will hike by 75 basis points in September, and see rates peaking in the 3.75-4.0% range
Asian shares slid on Monday as the mounting risk of more aggressive rate hikes in the United States and Europe shoved bond yields and the dollar sharply higher, and tested equity and earnings valuations.
Federal Reserve Chair Jerome Powell’s promise of policy ‘pain’ to contain inflation quashed hopes that the central bank would ride to the rescue of markets as so often in the past.
The tough message was driven home by European Central Bank board member Isabel Schnabel who warned over the weekend that central banks must now act forcefully to combat inflation, even if that drags their economies into recession.
That triggered a sharp fall in Euribor futures as markets priced in the risk the ECB could hike by 75 basis points next month.
The main takeaways are taming inflation is job number one for the Fed and the Funds Rate needs to get to a restrictive level of 3.5% to 4.0%, said Jason England, global bonds portfolio manager at Janus Henderson Investors.
The rate will need to stay higher until inflation is brought down to their 2% target, thus rate cuts priced into the market for next year is premature, he said.
Futures are now pricing in around a 64% chance the Fed will hike by 75 basis points in September, and see rates peaking in the 3.75-4.0% range.
Much might depend on what the August payrolls figures show this Friday when analysts are looking for a moderate rise of 285,000 following July’s 528,000 gain.
The hawkish message was not what Wall Street wanted to hear and S&P 500 futures were down a further 1.1%, having shed almost 3.4% on Friday. Nasdaq futures lost 1.5% with tech stocks pressured by the outlook for slower economic growth.
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.9%. Japan’s Nikkei dropped 2.8%, while South Korea shed 2.3%.
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