Fed Rate Hikes Trigger Global Market Reactions

The US economy is showing signs of strength, and the Federal Reserve is now looking to accelerate its rate hikes in response. Bond traders no longer view the odds of a rate cut this year as better-than-even, as the Fed’s eight rate increases in the past year have pushed the peak rate for Fed funds to around 5.40%, up from around 4.90% in January.[0]

The central bank’s move to raise rates was triggered by strong economic data, including persistently strong employment data and sticky inflation.[0] Fed chair Jerome Powell opened the door to bigger rate hikes during his testimony before the Senate Banking Committee, saying “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”[1]

The news sent US stocks tumbling, and markets now see a 50-basis-point increase as likely at this month’s meeting of the Federal Open Market Committee.[2] Meanwhile, a key recession indicator, the inversion between the 2-year and 10-year Treasury yields, hit a record 103.5 basis points on Tuesday, according to Refinitiv data.[2]

Asian shares were a mixed bag on Tuesday as fears over rising US interest rates hit overall sentiment in the region.[3] The dollar stabilised during earlier trade appreciating against every single G10 currency.[4] Gold remains shaky, vulnerable and heading for its worst month since mid-2021.[3] Oil prices have inched up today amid hopes of a strong economic rebound in China brightening the demand outlook.[4]

In January, Australian retail sales outperformed the market expectation of a 1.5% increase, growing 1.9% overnight.[3] This advancement could cause the RBA to stay vigilant, worsening anxieties in regards to the expansion projection.[3] The rally in the aussie has been cut short, with prices in AUDUSD under pressure with a breakdown below 0.6700 opening the doors to lower levels.[4]

At the 4 p.m. closing bell on Tuesday, the SPDR S&P 500 (NYSE: SPY) had dropped 0.66%.[5] Bank Of America CEO Brian Moynihan has predicted a technical recession in the third quarter of this year, but it remains to be seen if the Fed’s rate hikes will be able to keep the economy afloat.[5]

0. “Bond Traders Downgrade 2023 Fed Rate-Cut Odds to a Coin Toss” Forex Factory, 28 Feb. 2023, https://www.forexfactory.com/news/1208147-bond-traders-downgrade-2023-fed-rate-cut-odds-to

1. “Rand slumps after Fed rate warning | Business” News24, 7 Mar. 2023, https://www.news24.com/fin24/markets/rand-slumps-after-fed-rate-warning-20230307

2. “Dow drops 574 points as Fed chief Powell opens the door to steeper rate hikes” Business Insider Africa, 7 Mar. 2023, https://africa.businessinsider.com/markets/dow-drops-574-points-as-fed-chief-powell-opens-the-door-to-steeper-rate-hikes/1er63vm

3. “Risk sentiment wavers on Fed fears” Financial Mirror, 28 Feb. 2023, https://www.financialmirror.com/2023/02/28/risk-sentiment-wavers-on-fed-fears/

4. “Risk sentiment wavers on Fed fears” FXStreet, 28 Feb. 2023, https://www.fxstreet.com/analysis/risk-sentiment-wavers-on-fed-fears-202302280845

5. “The SPY Falls As Jerome Powell Testifies Inflation Remains Stubbornly High: A Look At The Chart – SPDR S&” Benzinga, 5 Mar. 2023, https://www.benzinga.com/trading-ideas/long-ideas/23/03/31245573/the-spy-falls-as-jerome-powell-testifies-inflation-remains-stubbornly-high-a-look-at-the