European stocks fell and Treasury bond yields rose on Thursday, after Federal Reserve chair Jay Powell warned that US interest rates were likely to rise more than previously anticipated as the central bank battled inflation.
The regional Stoxx Europe 600 declined 1.1 per cent in early trading. London’s FTSE fell 0.5 per cent ahead of the Bank of England’s policy meeting, with financial markets betting on a jumbo 0.75 percentage point interest rate rise. Contracts tracking Wall Street’s benchmark S&P 500 lost 0.2 per cent while those tracking the tech-heavy Nasdaq 100 fell 0.3 per cent.
The moves come after the Fed on Wednesday increased its main interest rate by 0.75 percentage points for the fourth time in a row, bringing the federal funds rate to a target range of 3.75 per cent to 4 per cent.
The S&P 500 was in positive territory immediately after the widely expected announcement, but ended the session down 2.5 per cent following Powell’s subsequent press conference.
Responding to questions, the central bank governor hinted that the pace of rate increases could slow as soon as the Fed’s December meeting but warned that with inflation running hot, “the ultimate level of interest rates will be higher than expected”.
US government bond prices fell as investors digested the news, with the yield on the 10-year Treasury note up 0.09 percentage points to 4.15 per cent on Thursday. Rising yields reflect lower prices. The two-year Treasury yield, which is particularly sensitive to monetary policy expectations, rose 0.11 percentage points to 4.68 per cent.
Mike Zigmont, head of trading and research at Harvest Volatility Management, said Powell’s statements were likely to snuff out investor optimism that has helped US stock indices rise over the past fortnight.
“We just set a new sentimental tone and it’s bearish. I don’t know if it’s going to get ugly but optimism is out the window for a while.”
The dollar index, which tracks the US currency against six others including the euro and sterling, strengthened 0.3 per cent on Thursday.
Asian equities fell sharply after China’s National Health Commission quashed rumours that the country was preparing to ease its strict zero-Covid approach.
“[We must] work to control sudden outbreaks of the pandemic . . . as quickly and at as low cost as possible,” the NHC said.
The statement from China’s top health authority sent domestic stocks lower on Thursday morning, with the benchmark CSI 300 and Hong Kong’s Hang Seng index down 0.8 per cent and 3.1 per cent, respectively.