Federal Reserve Governor Lael Brainard became on Wednesday the latest central bank official to signal that a hike may be in the offing, saying an improving global economy and a solid U.S. recovery meant it would be "appropriate soon" to raise rates.
European stocks held near 15-month highs and the dollar strengthened against other top global currencies on Thursday on growing expectations that the U.S. central bank will raise interest rates later this month. Federal Reserve Governor Lael Brainard became on Wednesday the latest central bank official to signal that a hike may be in the offing, saying an improving global economy and a solid U.S. recovery meant it would be “appropriate soon” to raise rates. Federal fund futures prices suggest markets see a 70 percent chance of a 25 basis point hike. European shares dipped after Wednesday’s strong showing, gains on Asian bourses and new record highs on Wall Street. Although higher interest rates would raise U.S. companies’ costs, they are also being seen as a sign of confidence in the economy and, along with U.S. President Donald Trump’s speech to Congress, were cited as factors behind Wall Street’s rise. Fed Chair Janet Yellen is due to speak on the economic outlook in Chicago on Friday.
The pan-European STOXX 600 index fell 0.1 percent after adding 1.5 percent on Wednesday and hitting its highest since December 2015, as losses on consumer-related stocks outweigh gains in healthcare and miners. MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.3 percent, while Japan’s Nikkei closed up 0.9 percent after hitting a 14-month high as a weaker yen helped exporters. The dollar index, which measures the greenback against a basket of six major currencies, hit a seven-week high. The euro fell 0.1 percent to $1.0535, the yen fell 0.5 percent to 114.26 per dollar and sterling was flat at $1.2290, having earlier touched a six-week low around $1.2260.
The prospect of higher rates and a potential $1 trillion boost to U.S. infrastructure sought by Trump pushed U.S. Treasury bond yields higher on Wednesday, but they pulled back from those highs on Thursday. Rate-sensitive two-year yields edged up to 1.292 percent, off Wednesday’s peak of 1.308 percent, its highest since 2009. German 10-year yields pulled back from the day’s highs after data showing euro zone inflation hit the European Central Bank’s 2 percent target last month, as expected. ING’s global head of debt and rates strategy Padhraic Garvey said prior to the data that such a reading could extend the bearish momentum in bonds. Oil prices for a third consecutive day after data showed a record build-up in U.S. crude inventories. Brent crude fell 11 cents to $56.25 a barrel.
The stronger dollar weighed on metals prices, which wee buoyed however, by signs of growing demand. Chinese factory activity expanded faster than expected in February, purchasing manager data showed on Wednesday. Copper, a key Chinese import, fell 0.3 percent to $5,995 a tonne. Gold fell 0.3 percent to $1,245 an ounce.