Hawkish central banks have triggered the biggest year-to-date outflow for global stocks as Treasury bond yields continue to test multi-year highs.
U.S. equity futures extended declines Friday, while the dollar hit a fresh two-year peak against a basket of its global peers and Treasury bond yields marched further higher, as traders reacted to hawkish remarks from central bank officials amid slowing economic growth signals.
Federal Reserve Chairman Jerome Powell told a panel at the International Monetary Fund’s spring meetings in Washington that there was a case for “front loading” rate hikes, adding that a 50 basis point move would be on the table for the May meeting.”
The CME Group’s FedWatch tool now suggests a near 100% chance of that size of a move early next month, that would take the base Fed Funds rate to a range of 0.75% to 1%, with a 90% chance of a similar move in June.
His remarks reversed gains for U.S. stocks in Thursday afternoon trading, with the Dow swinging to a 370 point loss and the S&P 500 closing 66 points lower to extend its April decline to 3.02%.
“The Fed is beginning to understand that 2% is not a realistic target over the near term. They’re in a tough spot, as the known unknowns are something they cannot control, i.e., Ukraine, supply chains, and the knock-on effects from China,” said Rob Daly, director of fixed income at Glenmede Investment Management.
“Going above neutral or adjusting the neutral rates is not out of the realm of possibility, and the probability of this happening has only gone higher.” he added.
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European Central Bank President Christine Lagarde also suggested her colleagues could begin rate hikes in July — far sooner than expected — in order to tame the highest rates of inflation on record in the euro area.
Her comments came just prior to data showing a slowdown in manufacturing activity around the region, based on S&P Global’s PMI readings, although solid service sector data is still providing support. PMI data for the U.S. will be published at 9:45 am, Eastern time.
European stocks were marked 1.3% lower in mid-day Frankfurt trading, while the region-wide MSCI ex-Japan index fell 1.07% as worlds stocks tumbled to the lowest levels in five weeks.
Benchmark 10-year note yields jumped to 2.95% in overnight trading, while 2-year notes hit 2.762%, the highest since December 2018, as traders re-set interest rate sensitive assets following Powell’s comments in Washington, which have coincided with the biggest weekly outflow of equity market funds — $17.5 billion — so far this year, according to Bank of America data.
The dollar index, which tracks the greenback against a basket of six global currencies, hit a fresh two-year high of 101.00 in overnight trading, was last seen 0.26% higher on the session at 100.841.
On Wall Street, futures contacts tied to the Dow Jones Industrial Average are indicating a 100 point opening bell decline while those linked the S&P 500 are priced for a 7 point move to the downside. Futures linked to the tech-focused Nasdaq are looking at a 5 point opening bell dip.
Twitter (TWTR) – Get Twitter, Inc. Report shares were back in focus following a report from the New York Post that suggests billionaire Tesla (TSLA) – Get Tesla Inc Report CEO Elon Musk could team up with private-equity firm Thoma Bravo in his $46.6 billion takeover bid for the social media group.
Gap Inc. (GPS) – Get Gap, Inc. Report shares plunged 14% after the clothing retailer slashed its first quarter sales forecast amid the twin pressures of rising input costs and supply chain disruptions.
Snap (SNAP) – Get Snap, Inc. Class A Report shares moved lower in pre-market trading after the instant messaging app maker cautioned that ad sales could be hit by the surge in inflation, as well as the supply chain challenges facing companies around the world, even as it forecast solid user growth.
American Express (AXP) – Get American Express Company Report edged 1% lower after posting stronger-than-expected first quarter earnings, but only confirming its full-year profit forecast, as travel and entertainment spending surged to reclaim levels last seen just prior to the 2020 pandemic.
Verizon Communications (VZ) – Get Verizon Communications Inc. Report fell 1.5% after modestly stronger-than-expected first quarter earnings that were dimmed by the carrier’s narrowing of full-year forecasts for wireless revenues and profit growth.
