Stocks Reel From Recession, Fed Rate Bets: Markets Wrap

(Bloomberg) — Global stock markets struggled on Wednesday, after comments from Federal Reserve Chair Jerome Powell boosted interest rate wagers, drove up Treasury bond yields and revived fears that the world’s largest economy will not be able to dodge a recession.

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Europe’s Stoxx 600 equity benchmark opened about 0.3% weaker, after an Asian stocks gauge fell more than 1%, with losses driven primarily by commodity shares. US equity futures traded around flat, after the underlying S&P 500 and Nasdaq indexes posted their biggest losses in two weeks. As the dollar extended the previous day’s 1% gain, oil prices lost more ground following Tuesday’s 3.6% drop.

Money markets are now pricing US interest rates rising above 5.6% later this year after Powell signaled readiness to speed up policy tightening should inflation keep running hot. That lifted rate-sensitive two-year Treasury yields past 5% for the first time since 2007, raising its premium over 10-year rates to a full percentage point for the first time since 1981, a level which according to Deutsche Bank strategists signals recession within a maximum eight months.

“We would be foolhardy to expect we can’t reach 6% on Fed rates, and clearly that has an impact on asset markets across the globe,” Rabobank strategist Jane Foley told Bloomberg Television. If the Fed has to work harder to get inflation down, “that certainly does imply recession,” she added.

Read more: Deepest Bond Yield Inversion Since Volcker Suggests Hard Landing

Read more: Global Investors Contemplate Fallout From US Rates Reaching 6%

As chances grew of a 50 basis-point move at the Fed’s March 21-22 meeting, analysts at Goldman Sachs added a July Fed hike to their forecasts. Rates are repricing higher elsewhere too, with wagers on the Bank of England rising as high as 5% on Wednesday, while an additional 150 basis points of tightening is now priced from the European Central Bank.

The pain is hitting emerging markets, with MSCI’s emerging equity gauge losing as much as 1.6%, while a fall in China’s yuan saw the central bank signal its intention to support the currency.

Rabobank’s Foley noted the dollar’s rise — it is close to its highest levels for this year — would filter through to emerging economies which could find themselves having to raise interest rates further. “That leads to the impression global growth will also be slowing,” she said

Powell speaks to Congress again later in the day, though the next highlight will be Friday’s February jobs data. Payroll growth has topped estimates for 10 straight months in the longest streak in decades, a trend that, if extended, will boost pressure on the Fed to keep raising interest rates.

Key events this week:

Euro area GDP, Wednesday
US MBA mortgage applications, ADP employment change, trade balance, JOLTS job openings, Wednesday
Fed Chair Powell’s semiannual Monetary Policy Report to the House Financial Services Committee, Wednesday
Canada rate decision, Wednesday
EIA crude oil inventories, Wednesday
China CPI, PPI, Thursday
US Challenger job cuts, initial jobless claims, household change in net worth, Thursday
Bank of Japan policy rate decision, Friday
US nonfarm payrolls, unemployment rate, monthly budget statement, Friday

Some of the main moves in markets:

Stocks

S&P 500 futures were little changed as of 3:22 a.m. New York time
Nasdaq 100 futures were little changed
Futures on the Dow Jones Industrial Average were little changed
The Stoxx Europe 600 fell 0.2%
The MSCI World index fell 0.3%
S&P 500 futures were little changed
Nasdaq 100 futures were little changed
The MSCI Asia Pacific Index fell 1.1%
The MSCI Emerging Markets Index fell 1.4%

Currencies

The Bloomberg Dollar Spot Index was little changed
The euro was little changed at $1.0544
The British pound was little changed at $1.1827
The Japanese yen fell 0.2% to 137.49 per dollar
The offshore yuan rose 0.2% to 6.9803 per dollar

Cryptocurrencies

Bitcoin fell 0.3% to $21,981.15
Ether was little changed at $1,551.72

Bonds

The yield on 10-year Treasuries advanced two basis points to 3.98%
Germany’s 10-year yield was little changed at 2.70%
Britain’s 10-year yield advanced two basis points to 3.84%

Commodities

This story was produced with the assistance of Bloomberg Automation.