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 The dollar, hammered by a virtual abandoning of expectations for
tighter rates this year, hit three-week highs after Atlanta Federal
Reserve President Dennis Lockhart and other officials on Tuesday
played up chances of hikes this year.
Any shift toward more tightening would be bad news for stock
markets, which have been comforted by the idea there would be no
squeeze on the funds and companies that have borrowed and invested
trillions of dollars globally over the past decade.
Asian markets fell broadly on that view, with Hong Kong and China
down around 1.5 percent. European markets were steady to
slightly lower while Wall Street was set to open flat.
"A barrage of comments from regional Fed presidents has forced rate
markets to begin pricing more chance of Fed tightening in the coming
months," analysts from French bank BNP Paribas said in a morning
note.
"The shift supports the dollar and this adjustment could conceivably
have quite a bit further to go."
Data on Tuesday showed the biggest rise in U.S. consumer prices in
more than three years in April as gasoline prices and rents rose,
while other data showed housing starts and industrial production
rebounded strongly.
Lockhart, viewed as a centrist on the Federal Reserve's board, said
he still assumed there would be two to three rate hikes this year, a
view echoed by San Francisco Fed President John Williams.
Interest rate futures <0#FF:> moved to price in a 70 percent chance
of a hike by December, with a 50 percent chance of a move priced in
by September. Chances of one in June were still just 15 percent, up
from less than 5 percent on Tuesday.
That puts minutes from the Fed's April meeting due at 1800 GMT front
and center for investors on Wednesday. [FED]
Deutsche Bank credit strategist Jim Reid suggested the U.S. central
bank was for the moment just keeping its options open.
"There's still a clearly large gap between where the market is and
the recent rhetoric from the Fed," he said. "Importantly we're yet
to hear from either the Fed President (Janet) Yellen or Vice-Chair
(Stanley) Fischer recently."
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Fischer is due to speak publicly on Thursday, Yellen not until next
week.
BREXIT, OR NOT
A UK poll provided some comfort to financial investors worried about
the chances of Britain voting to leave the European Union next month
- showing the "In" campaign 18 points in front. That drove sterling
to its highest in three weeks.
Stoking inflation expectations is a recent recovery in oil prices, which hit
seven-month highs on Tuesday, on expectations of a drawdown in U.S. crude
stockpiles and a new wildfire threat on Canadian oil supplies.
After some morning losses U.S. crude futures <CLc1> were flat at $48.26, within
sight of Tuesday's high of $48.76 per barrel.
Japanese shares and the yen were volatile, with markets digesting surprisingly
strong annualized 1.7 percent growth in the January-March quarter that may be
masking pockets of weakness.
The Nikkei 225 ended flat, as the yen gave up gains seen immediately following
the GDP data to slip 0.1 percent to 109.26 per dollar.
"The yen strengthened a bit because growth was stronger than many had expected,"
said Ayako Sera, market strategist at Sumitomo Trust and Banking. "But looking
at the details, there were still some concerning areas, including capital
spending."
Markets are now looking to Prime Minister Shinzo Abe's meeting with his
coalition party leader, where he could discuss postponing a planned sales tax
hike to support the flagging economy.
If that adds up to less chance of additional monetary easing by the Bank of
Japan it might support the yen, but gains for Tokyo stocks generally push the
currency in the opposite direction.
(editing by John Stonestreet)
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