Hawkish Fed hurts stocks, dollar rebounds
The hawkish tones from Federal Reserve members yesterday are still rippling through the markets today. Patrick Harker and Charles Evens said the US central bank might look to lift rates three times this year. Mr Harker went even further, by stating there might even be four rate hikes in 2022. The remarks were not a total shock, but they certainly added to the hawkish signals that have been circulating recently. The US 10-year yield is 1.75%, up on the session, but keep in mind that it was 1.80% on Monday. Although stocks are under pressure, the S&P 500 is still above the lows that were registered on Monday when the US 10-year yield spiked. The fact the equity markets haven’t fallen below the recent lows could be taken as a sign the traders are getting used to the idea there might be three or possibly four rate hikes this year. It seems that equity markets are taking their cues from bond yields, and while the 10-year yield remains relatively contained, stocks seem less likely to slump.
It has been a volatile week for the US dollar index as it lost ground for four consecutive sessions – falling to a two-month low – and today it has rebounded. For most of the week, the dollar was moving in the opposite direction to the 10-year yield, but now they are moving higher, which is more typical of their behaviour. USD/JPY is down over 0.3%, due to the sharp rally in the yen. The bearish sentiment running through stocks, has driven up demand for currencies such as the yen and the Swiss franc. GBP/USD and EUR/USD have retreated from recent multi-month highs due to the firmer US dollar.
US retail sales in December dropped by 1.9%, which was far worse than the 0.1% decline that economists anticipated. It could be construed that consumer appetite was weak last month or perhaps, shoppers avoided city centres due to worries about the omicron variant of Covid-19.
Gold is being pushed around by the dollar and the risk-off sentiment in the markets. The metal is unchanged on the session as the flight to quality play is being counteracted by the upward move in the greenback. By contrast, silver and copper have been hit hard by the jump in the dollar.