US stocks turned lower on Wednesday as investors prepared for the Federal Reserve’s latest monetary policy decision, in which the US central bank is expected to raise rates again to keep up the fight against inflation.
The blue-chip S&P 500 was down 0.3 per cent and the tech-heavy Nasdaq Composite was 0.1 per cent lower in lunchtime trading in New York.
Expectations that interest rates would stay elevated for an extended period of time have ebbed in recent weeks, as traders bet that turmoil in the banking sector triggered by the collapse of Silicon Valley Bank and UBS’s takeover of rival Credit Suisse would force the Fed to slow or even pause its tightening cycle.
Futures markets indicate traders are expecting the Fed to raise rates by 0.25 percentage points from the current range of 4.5 per cent to 4.75 per cent.
“There are great uncertainties as to whether the Fed can both tighten and simultaneously try to ease the stress for, among other things, the regional banks,” said analysts at SEB Research.
The Fed will also publish revised projections about the path for monetary policy to 2025, as well as forecasts for growth, unemployment and inflation. The central bank last published officials’ estimates in December, when most thought the federal funds rate would peak at 5 per cent to 5.25 per cent.
Shares in First Republic, hardest hit among the regional banks which have suffered massive outflows of deposits, dropped 3.3 per cent. The KBW Bank index lost 2.2 per cent.
“Panic over the banking system has definitely eased, largely due to the aggressive policy response from Federal Reserve, Federal Deposit Insurance Corporation and Treasury,” said Ryan Sweet, chief US economist at Oxford Economics. “Now everyone is in a holding pattern before the Fed’s interest rate decision.”
European equities closed higher. The region-wide Stoxx 600 rose 0.2 per cent and the CAC 40 in Paris finished 0.3 per cent higher.
London’s FTSE 100 rose 0.4 per cent after UK inflation unexpectedly jumped to 10.4 per cent in February, bolstering market expectations that the Bank of England would increase its benchmark interest rate on Thursday. Investors now expect a quarter-point rate rise from the BoE.
“I think the BoE have got the same choice that the European Central Bank had last week and the Fed have tonight,” said Neil Birrell, chief investment officer for Premier Miton. “The equation is raising rates to beat inflation, but not squash the economy and make sure the financial system remains robust — that makes everything more difficult.”
Sterling rose 0.2 per cent against the dollar, approaching a two-month high, while the yield on the 10-year gilt rose 0.8 percentage points to 3.45 per cent. The yield on two-year gilts rose 0.2 percentage points to 3.5 per cent. Yields move inversely to price.
US Treasuries rose, with the yield on the two-year note, which is sensitive to interest rate expectations, down 0.02 percentage points to 4.16 per cent. The yield on the 10-year note fell 0.04 percentage points to 3.56 per cent.
ECB president Christine Lagarde on Wednesday warned of a “tit-for-tat” dynamic between workers and companies which shifts up profit margins and wages, increasing price pressures as both groups try to avoid a hit from higher inflation. Her comments pushed the euro up slightly to a five-week high of $1.079 against the dollar.
Efforts to curb contagion in the financial system, including a suggestion from US Treasury secretary Janet Yellen that the government could step in to back all deposits at the country’s smaller lenders, had helped assuage nerves on Tuesday.
The Euro Stoxx Banks index fell 0.2 per cent after rallying nearly 4 per cent in the previous session. The Hang Seng Finance index and Topix Banks index were up 1.7 per cent and 2.2 per cent respectively.
Asian stocks advanced, with Hong Kong’s Hang Seng index adding 1.7 per cent and South Korea’s Kospi rising 1.2 per cent. Japan’s Topix jumped 1.7 per cent after markets reopened following a one-day break for the vernal equinox holiday.
Oil prices increased, with the US marker West Texas Intermediate adding 1 per cent to trade at $70.44 a barrel. The international benchmark Brent crude rose 1.1 per cent to $76.16.
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