Investor focus on rate hike helps avoid Trump slump
london — The dollar and US Treasury yields jumped on Wednesday, while stocks were mixed, as investors focused less on US President Donald Trump’s first speech to Congress and more on what they see as a growing chance of a US interest rate hike this month.
Trump took a measured tone in his keenly awaited speech on Tuesday, saying he was open to immigration reform, but failing again to provide much detail on his plans for tax reform and infrastructure spending. For markets, the speech was overshadowed by comments from a handful of Federal Reserve policymakers, who suggested ratesetters are worried about waiting too long to raise interest rates in the face of pending economic stimulus from Washington.
New York Fed President William Dudley — one of the most influential US central bankers, and usually considered a dove — said the case for tightening monetary policy had become “a lot more compelling”, while San Francisco Fed President John Williams said he saw “no need to delay” raising rates.
Having priced in only around a 30 per cent chance that the Fed would move this month before the Fed comments, investors moved to price in around a 68 per cent probability of a March hike, according to data. By June, an 84 per cent chance of at least one hike has now been priced in.
The dollar index, which measures the greenback against a basket of other major currencies, climbed as much as 0.7 per cent to its highest levels in seven weeks, having also been helped by data showing robust US consumer spending. Two-year US Treasury yields jumped to 1.304 percent, the highest since December, to match their highest levels since 2009. The gap between them and their German equivalents increased to its widest since 2000.
European shares gained, with basic resources the top-performers on Trump’s promise of $1 trillion of infrastructure spending.
The pan-European STOXX 600 index rose one per cent, with Germany’s DAX and France’s CAC 40 outperforming peers to climb 1.3 per cent and 1.4 per cent, respectively, helped by strong company earnings reports.
The global MSCI ACWI index, which has risen more than 10 per cent since Trump’s election in November, was flat, with gains in Europe offsetting earlier falls on Asian and US bourses. The MSCI’s broadest index of Asia-Pacific shares outside Japan dipped 0.2 per cent.
Trump pledged to overhaul the immigration system, improve jobs and wages for Americans and deliver “massive” tax relief to the middle class and tax cuts for companies, but offered few clues on how they would be achieved.
“The market has been looking for reassurance that Trump intends to follow through on his campaign promises for fiscal spending, tax cuts and deregulation,” said James Woods, global investment analyst at Rivkin in Sydney.
“He mentioned these policies but did not provide any actual details or time lines, which is what investors are looking for.”
US stock futures still pointed to a higher open after Trump’s address. E-mini S&P futures rose 0.5 per cent, after the Dow Jones Industrial Average snapped a 12-day winning streak to close down 0.1 per cent in the prior session. —