Stocks, Dollar, and Yields React to Warsh Speech as Rate Hike Bets Grow
Market Reactions to Warsh's Speech and Rate Hike Expectations
By Sinéad Carew and Alun John
Fed Chair Warsh's Comments and Policy Outlook
NEW YORK/LONDON Aug 28 (Reuters) - MSCI's global equities gauge fell in a choppy session on Friday, while short-dated U.S. Treasury yields climbed with the dollar as traders added to bets for an interest rate hike after a speech by Federal Reserve Chair Kevin Warsh.
Warsh said, at the Fed's annual economic symposium in Jackson Hole, that the U.S. central bank will "have work to do" if policymakers are not confident that underlying inflation is returning to its 2% target, in remarks that acknowledged financial conditions do not appear restrictive.
After the comments, bets that rates would be raised at the September meeting rose to a 55.7% probability from 35.4% on Thursday, according to CME Group's FedWatch tool. Three Fed officials have already warned about sticky inflation, but Warsh had previously resisted giving forward guidance on the path of interest rates.
Expert Analysis on Fed's Stance
"He had to come out and say something about the policy outlook, reiterating the Fed's intent to control inflation, reinforcing the Fed's inflation-fighting credentials," said Gary Schlossberg, global strategist at Wells Fargo Investment Institute.
"He threw a lot of dots out there and when you connect them, in effect, that's what he was saying. Unless inflation rolls over, and we don't expect it to. If anything, the pressure may build a bit over the next 6 to 8 months. He didn't come right out and say it, but all the ingredients seem to be there at this point for at least one rate increase, if not more, going forward."
Stock Market Performance
Major Indexes and Sector Moves
Among Wall Street indexes, the Dow Jones Industrial Average fell 9.45 points, or 0.02%, to 53,559.99; the S&P 500 fell 19.23 points, or 0.25%, to 7,711.76 and the Nasdaq Composite fell 138.93 points, or 0.52%, to 26,402.42.
The Russell 2000 index underperformed with a 1.4% loss on the day along with the technology sector.
Impact on Small Caps and Tech Stocks
Philip Straehl, chief investment officer at Morningstar Wealth, noted that smaller companies and technology stocks are more sensitive to rising interest rates.
MSCI's gauge of stocks across the globe fell 1.54 points, or 0.13%, to 1,153.16.
Earlier, the pan-European STOXX 600 index finished up 0.51%.
Bond and Currency Markets
U.S. Treasury Yields
In the bond market, the 2-year note yield, which typically moves in step with Fed interest rate expectations, rose 12.79 basis points to 4.36%, from 4.232% late on Thursday.
"What was viewed as hawkish is the acknowledgement that inflation remains a concern and that he views the interest rate channel as the way of addressing inflation concerns," said Morningstar's Straehl, adding that it was being "baked into market expectations at the short end."
The yield on benchmark U.S. 10-year notes rose 5.6 basis points to 4.728%, while the 30-year bond yield rose 2.19 basis points to 5.2129%.
Dollar Strength and Forex Moves
In foreign exchange markets, the dollar jumped against other major currencies and was on track for its biggest daily climb in 2-1/2 months on the prospect of rising rates.
The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.61% to 99.71, with the euro down 0.61% at $1.158.
Against the Japanese yen, the dollar strengthened 0.45% to 160.11.
Other Markets: Crypto, Commodities, and Precious Metals
Cryptocurrency Market
In cryptocurrencies, bitcoin fell 3.34% to $77,413.77.
Oil and Energy Prices
Meanwhile, oil prices settled slightly lower on the day and marked their first weekly decline in three weeks as traders evaluated Warsh's speech along with rumors of a possible agreement on shipping through the Strait of Hormuz.
U.S. crude settled down 0.16%, or 13 cents, at $83.40 a barrel and Brent settled at $89.31 per barrel, down 0.43%, or 39 cents, on the day.
Precious Metals
In precious metals, spot gold fell 3.19% to $4,454.52 an ounce while spot silver fell 4.3% to $66.28 an ounce.
(Reporting by Sinéad Carew, Karen Brettell, Alun John and Stella Qiu; Editing by Kim Coghill, Mark Potter, Sharon Singleton and Leroy Leo)
