LONDON/SYDNEY – World shares slipped and the dollar and bond yields jumped on Thursday after the US Federal Reserve shifted the outlook on its tightening from short and sharp to long and high, and as Europe braced for Britain's biggest rate hike in decades.
European shares opened nearly 1 percent lower after even heavier falls in Asia and as a 1.25 percent surge in the dollar marked its biggest rise since late September.
Investors had initially been cheered that the US Fed at least opened the door to a slowdown in the pace of hikes after raising interest rates 75 basis points to 3.75-4.0 percent, by noting that monetary policy acted with a lag.
But Chair Jerome Powell soured the mood by saying it was "very premature" to think about pausing and that the peak for rates would likely be higher than previously expected.
"The Fed is now more comfortable with taking smaller rate increases for a longer period than delivering larger increases now," said Brian Daingerfield, an analyst at NatWest Markets.
"The tightening cycle is officially now a marathon, not a sprint."
Futures were split on whether the Fed would move by 50 or 75 basis points in December, and nudged up the top for rates to 5.0-5.25 percent likely by May. They also imply little chance of a rate cut until December 2023.
"We see the risks to our peak funds rate forecast of 4.75-5 percent as tilted to the upside," analysts at Goldman Sachs wrote.
All this was not what the equity markets wanted to hear and Wall Street fell sharply after Powell's comments. Asia share markets fell 1.6 percent overnight, while S&P 500, Dow and Nasdaq futures, were down 0.1 percent – 0.2 percent again.
BoE takes the stage
Taking center stage next will be the Bank of England. The market is fully priced for a rate hike of 75 basis points to its highest since late 2008 at 3.0 percent.
Stuart Edwards, a fund Manager at Invesco said: "I’m sure that (BoE) Governor Bailey will also re-iterate the MPC’s commitment to fighting inflation."
His greater interest though will be on the Bank’s Monetary Policy Report that will include new CPI and GDP forecasts and show how rapidly the BoE sees Europe's second largest economy weakening.
"That may not influence the immediate path of rates," Edwards said. "But it could impact where this hiking cycle tops out. That’s important for bond investors."
A gloomy outlook could put more pressure on the pound, which tumbled to $1.1258 in London after retreating from a top of $1.1564 overnight.
Two-year UK Gilt yields also popped back over 3 percent. US Treasury yields were nearly at 4.7 percent as the curve 'bear flattened', with the spread to 10-year notes near its most inverted since the turn of the century.
After the BoE, attention will move to the US ISM survey of services later on Thursday and Friday's payrolls report where any upside surprise will likely reinforce the Fed's hawkish outlook.
The US dollar was broadly bid following Powell's hawkish take, and found fresh momentum in Europe leaving the dollar index at 112.860 after an overnight bounce from a 110.400 low.
The euro was knocked back to $0.9755 , having toppled from a high of $0.9976 overnight. The dollar also raced to 148.24 yen having troughed at 145.68 on Wednesday.
The bounce in the dollar and yields was a drag for gold, which was stuck at $1,637 an ounce after being as high as $1,669 at one stage overnight.
Oil prices also disliked the dollar rally with Brent down 29 cents at $95.87 a barrel, while US crude fell 44 cents to $89.56.
In good news for bread lovers, wheat futures plummeted overnight after Russia said it would resume its participation in a deal to export grain from Ukraine.