Wall Street was poised to open with losses again on Thursday, one day after a retreat by investors dismayed over the Federal Reserve’s warning that still more interest rate hikes are in store following its latest increase.
Futures for the S&P 500 were down 0.9 per cent and futures for the Dow Jones Industrial Average tumbled 0.7 per cent.
The declines followed the US Federal Reserve’s hike in its key short-term rate by half a percentage point, the seventh increase this year. The Bank of England raised its main lending rate by a half-point Thursday morning and the European Central Bank is expected to follow suit later Thursday with a similar increase.
The US will release Thursday its weekly report on unemployment benefits, along with retail sales data for November. US consumer spending and employment remain strong, hindering the Fed’s fight against inflation, but helping protect the slowing economy from a possible recession.
The US central bank’s increase in its key short-term rate by 0.50 percentage points Wednesday was expected. What spooked investors was Fed officials saying they expect rates to climb higher in coming years than previously anticipated.
“The Fed did not welcome the disinflation trends that have just started to emerge and focused on robust job gains and elevated inflation,” Edward Moya of Oanda said in a commentary. “Any hopes of a soft landing disappeared as the Fed seems like they are committed to taking rates much higher.” Wednesday’s hike was smaller than the previous four 0.75 percentage point increases and takes the federal funds rate to a range of 4.25 per cent to 4.5 per cent, the highest level in 15 years. It followed an encouraging report showing that inflation in the US slowed in November for a fifth straight month, to 7.1 per cent.
Fed policymakers forecast that the central bank’s rate will reach a range of 5 per cent to 5.25 per cent by the end of 2023.
Recent signs that inflation has eased had stoked optimism that the Fed might signal the possibility of rate cuts in the second half of next year. But Fed Chair Jerome Powell emphasised that the full effects of the central bank’s efforts to slow the economy to bring down inflation have yet to be fully felt.
The Fed plans to hold rates at a level high enough to slow the economy “for some time” to ensure inflation really is crushed. Projections released Wednesday did not include any rate cuts in 2023.
“I wouldn’t see the committee cutting rates until we’re confident that inflation is moving down in a sustained way,” Powell said.
The Fed did signal it expects its rate to fall to 4.1 per cent by the end of 2024 and 3.1 per cent by late 2025.
In Europe, Germany’s DAX sank 1.2 per cent, as did the CAC 40 in Paris. Britain’s FTSE 100 slipped 0.5 per cent.
Japan reported its trade deficit surged to over 2 trillion yen (USD 15 billion) in November as higher costs for oil and a weak yen combined to push imports higher. It was the 16th straight month of red ink and a record high for the month of November.
Also Thursday, the Asian Development Bank downgraded its forecasts for developing economies in Asia, putting growth for the region at 4.2 per cent this year and 4.6 per cent in 2023. The earlier forecasts had put 2022 growth at 4.3 per cent and 2023’s expansion at 4.9 per cent.
The update forecast a 3 per cent expansion for China, the world’s second-largest economy, in 2022, with growth in 2023 expected to rise to 4.3 per cent as stringent pandemic restrictions are eased.
In Asian trading, Tokyo’s Nikkei 225 lost 0.4 per cent to 28,051.70 and the Hang Seng in Hong Kong sank 1.6 per cent to 19,368.59. The Kospi in Seoul gave up 1.6 per cent to 2,360.97.
The Shanghai Composite index gave back 0.3 per cent to close at 3,168.65 and Australia’s S&P/ASX 200 shed 0.6 per cent to 7,204.80.
Shares fell in Taiwan and Bangkok but rose in Mumbai.
In other trading Thursday, US benchmark crude gave up 3 cents to USD 77.31 per barrel in electronic trading on the New York Mercantile Exchange. It gained USD 1.89 to USD 77.28 a barrel on Wednesday.
Brent crude, the pricing basis for international trading, also fell 3 cents, to USD 82.73 per barrel.
The US dollar rose to 136.49 Japanese yen from 135.46 yen. The euro fell to USD 1.0622 from USD 1.0682.
On Wednesday, the S&P 500 lost 0.6 per cent and the Dow industrials shed 0.4 per cent. The Nasdaq composite gave back 0.8 per cent while the Russell 2000 index lost 0.7 per cent.