US stocks slipped at market opening on Monday, as the Federal Reserve looks poised to raise interest rates to their highest levels since the 2008 global financial crisis when it meets on Wednesday.
Wall Street’s benchmark S&P 500 fell 0.2 per cent, while the tech-heavy Nasdaq Composite lost 0.8 per cent soon after the opening bell. The dollar was largely flat, losing 0.05 per cent, while 10-year Treasury yields rose 0.01 per cent to 3.53 per cent.
The Fed is expected to raise interest rates by a quarter of a percentage point, continuing to scale back the size of its increases. Early data have shown that the central bank’s aggressive efforts to combat inflation are bearing fruit, but chair Jay Powell could yet buck expectations that the Fed will stop raising rates and cut them later in the year.
“A key uncertainty going into the meeting will be how Powell judges the evolution of financial conditions. The main hawkish risk in this meeting is that Powell expresses his uneasiness with the recent loosening in financial conditions, and the sharp run-up in equity prices so far this year,” Thomas Costerg, senior US economist at Pictet Wealth Management, wrote in a note.
Investors are also looking ahead to Apple and Alphabet’s fourth-quarter earnings in what will be a key week for corporate results.
European stocks slipped by mid-afternoon. The region-wide Stoxx Europe 600 traded 0.2 per cent lower after fresh data showed a surprise 0.2 per cent drop in fourth-quarter German gross domestic product, just as Spain’s inflation rate rose by 5.8 per cent in the year to January, up from 5.5 per cent in December.
The euro gained 0.2 per cent against the dollar and the yield on 10-year German Bunds rose 0.03 percentage points to 2.27 per cent. Bond yields move inversely to prices. The UK’s FTSE 100 was trading relatively flat by mid-afternoon trading.
Equity markets have rallied so far this year on growing optimism that global growth will be less anaemic than previously feared, helped by falling energy prices in Europe and China’s abrupt reversal of zero-Covid measures in place since early 2020. Yet higher equity prices are thought to raise consumer spending — exactly what central banks, which are determined to drag down inflation, are attempting to prevent.
Financial conditions have been further loosened by a weaker dollar, declining Treasury yields and tighter credit spreads, according to analysts at ING, “and it may feel that any further loosening, fuelled by talk of potential policy easing in the second half of the year, could undermine [the Fed’s] current actions in fighting inflation”.
The key question for the Bank of England, meanwhile, is whether it acknowledges its work is nearly complete. “We suspect it’s more likely to keep its options open,” the analysts said, adding that market expectations of European Central Bank rate cuts in 2024 were “premature”.
In Asia, Hong Kong’s Hang Seng index fell 2.7 per cent, dragged lower by a 6 per cent decline for Alibaba. China’s CSI 300 gained roughly 0.5 per cent.
