Stocks, bonds rise as Fed tightening bets cut back

A global wave of monetary tightening alongside commodity-fuelled price pressures could yet hurt economic growth


WASHINGTON • Stocks climbed amid a bout of investor relief after the Federal Reserve (Fed) raised interest rates as expected to tackle high inflation while countering fears of super-sized hikes.

European shares jumped 1.8% at the open, following the S&P 500 index’s biggest daily advance since 2020 and a move higher in Asian bourses. Futures on the S&P 500 and Nasdaq 100 slipped while the dollar turned higher with Treasury yields.

Fed chairman Jerome Powell (picture) said a 75-basis points (bps) hike is “not something that the committee is actively considering”, spurring the market rally. The Fed raised rates a half point and signalled similar moves for the next couple of meetings.

“Removing some of the uncertainty is helpful in getting some of the cash that has been on the sideline back into the markets, whether it’s bonds or equities,” Main Street Asset Management LLC CIO Erin Gibbs said on Bloomberg TV.

The market reaction is likely to evolve as investors digest Powell’s commentary. A global wave of monetary tightening alongside commodity-fuelled price pressures could yet hurt economic growth. Russia is also continuing its war in Ukraine and China’s Covid curbs are snarling global supply chains.

In Europe, German factory orders plummeted, highlighting the toll from the war. European Central Bank executive board member Fabio Panetta said economic expansion has almost ground to a halt in the euro area.

The Bank of England is expected to raise rates later to their highest level in 13 years and clarify how it plans sell off some of its £847 billion (RM4.63 trillion) in government bond holdings.

Climbs in oil and wheat underlined the risks. Crude hit US$108 (RM468.72) a barrel on a European Union plan to ban Russian barrels over the next six months. Wheat rose on the possibility of export curbs by major grower India.

“The market is way too optimistic about the Fed’s ability to tame inflation,” Quadratic Capital Management LLC CIO Nancy Davis wrote in a note. “We may be facing a stagflation environment.”

Swaps linked to Fed meetings are now pricing in less than 150bps of further rate increases over the June, July and September decisions. That hints at doubts about the scope for another three hikes of 50bps apiece.

The US central bank will also allow its holdings of Treasuries and mortgage-backed securities to decline in June at an initial combined monthly pace of US$47.5 billion, stepping up over three months to US$95 billion.

Gold rose 1% amid the drop in yields and cooling policy-tightening expectations. That dynamic also allowed bitcoin to hold a climb toward US$40,000.