Wall Street stocks slipped at the open on Wednesday after Federal Reserve chair Jay Powell said in his congressional testimony that US interest rates will need to go higher in order to contain inflation.
Wall Street’s benchmark S&P 500 fell 0.5 per cent and the tech-heavy Nasdaq Composite lost 0.8 per cent in early trade, putting both indices on course for a third successive session of losses.
The drop came after the publication of Powell’s semi-annual testimony before the House financial services committee, in which he said the Fed’s historic tightening campaign still “has a long way to go” before the economy slows sufficiently to bring inflation back to the 2 per cent target.
The US central bank opted to keep the benchmark federal funds rate steady last week, at a target range of between 5 per cent and 5.25 per cent, but signalled that two additional rate increases were likely later in the year.
Traders have priced in a 74 per cent probability that the Fed will go ahead with another quarter-point increase at the next policy meeting in July, according to data compiled by Refinitiv and based on interest rate derivatives prices.
The dollar, which tends to strengthen when investors expect higher rates, gained 0.1 per cent against a basket of six peer currencies.
“A successful rate-cut pushback this week by Powell can offer the dollar some support in the near term, but the greenback is set to remain overwhelmingly more sensitive to data as market pricing remains unanchored from the Fed’s . . . projections”, said Francesco Pesole, FX strategist at ING.
Meanwhile, Europe’s region-wide Stoxx 600 was 0.5 per cent lower, while France’s Cac 40 gave up 0.6 per cent and Germany’s Dax lost 0.4 per cent.
In the UK, official data on Wednesday showed that the annual rate of consumer price inflation remained at 8.7 per cent in May, well above analysts’ expectations of 8.4 per cent, reinforcing investors’ view that the central bank is far from the end of its tightening cycle.
Core inflation, which excludes volatile food and energy prices, rose again to 7.1 per cent in May, from 6.8 per cent in the previous month.
Futures markets indicated a slightly more than 50 per cent probability that the BoE will increase interest rates by 0.25 percentage points, from its current level of 4.5 per cent, when policymakers meet on Thursday, but the odds of a larger half-point rise climbed.
“I don’t think [inflation] is high enough to materially increase the chances of a 50 basis point increase tomorrow but it certainly raises the risks that we get hikes beyond 5 per cent in August”, said Imogen Bachra, head of UK rates strategy at NatWest.
Yields on two-year gilts, which are sensitive to interest rate changes, rose 0.17 percentage points to 5.11 per cent, while the yield on the benchmark 10-year rose 0.11 percentage points to 4.5 per cent. Bond yields rise as prices fall.
The pound strengthened 0.3 per cent against the dollar to trade at $1.28 before pulling back to $1.27.
London’s FTSE was flat, but registered a 1.5 per cent decline in real estate stocks, as “rising interest rate expectations have pushed up monthly mortgage payments, which will contribute to a slowdown in trading activity and house prices this year”, said Tom Bill, head of UK residential research at Knight Frank.
Equities traded lower in Asia, with China’s benchmark CSI 300 stock index falling 1.5 per cent, while the Hang Seng China Enterprises index of Hong Kong-listed mainland companies dropped 2 per cent.
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