LDN - Business

World stocks steady, dollar ticks up on Powell-watch

[August 26, 2022] By Carolyn Cohn and Stella Qiu

LONDON/SYDNEY (Reuters) - World stocks were flat on Friday and the dollar edged up as traders and investors awaited a speech from Federal Reserve Chair Jerome Powell for clues on the gradient of the U.S. central bank's rate-hike path.

Investors have pared back expectations that the Fed could pivot to a slower pace of rate hikes, as U.S. inflation remains at 8.5% on an annual basis, well above the central bank's 2% target. But Powell's speech at 1400 GMT at the Fed's annual conference at Jackson Hole will be scrutinised for any indication that an economic slowdown might alter its strategy.

Interest rate futures now imply a 60% chance of a 75 basis point (bps) Fed hike in September.

"The Fed and other central banks have been falling asleep at the wheel over inflation, now they are desperate to regain crediblity," said Luca Paolini, chief strategist at Pictet Asset Management.

"Economists are clearly calling for the Fed not to blink, and if anything accelerate the pace of tightening."

MSCI's world equity index was little changed and was heading for a modest 0.5% drop on the week.

U.S. S&P futures fell 0.25%, European stocks edged up 0.16% and Britain's FTSE 100 rose 0.58%.

German consumer sentiment is set to hit a record low for the third month in a row in September as households brace for surging energy bills, a survey showed, while French consumer confidence unexpectedly rose in August.

Overnight on Wall Street, stocks rose while Treasury yields slipped, as investors digested comments from Fed officials who continued hammering the point that they will drive rates up and keep them there until inflation has been squeezed from the economy.

"So it is a fair bet that the Powell speech will take a similar turn today," said Robert Carnell, regional head of Research, Asia-Pacific, at ING.

"If so, the most likely market reaction would be a rise in yields at both the front and back of the yield curve, a sell-off in equities and dollar strength, as markets seem to have been positioning themselves for a more supportive set of comments."

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U.S. Federal Reserve Board Chair Jerome Powell speaks during his re-nominations hearing of the Senate Banking, Housing and Urban Affairs Committee on Capitol Hill, in Washington, U.S., January 11, 2022. Brendan Smialowski/Pool via REUTERS

The dollar firmed by a slight 0.1% against a basket of major currencies, close to recent 20-year highs.

The euro was little changed at $0.9968 after hitting a 20-year low of $0.9899 earlier this week, with Fed rate hike expectations supporting the U.S. currency. The dollar rose 0.4% to 137.04 yen.

Sterling fell 0.44% against the dollar after Britain's energy regulator said energy bills will rise 80% from October.

The yield on benchmark U.S. 10-year Treasury notes rose 5 bps to 3.0762%, while the two-year yield touched 3.3925%, up by 2 bps. German 10-year bond yields rose 3 bps to 1.351%.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.5% to one-week highs.

Resources-heavy Australia shares gained 0.8% while Japan's Nikkei advanced 0.6%.

A surge in Chinese tech shares listed in Hong Kong, buoyed by hopes for an audit deal between the United States and China, ran out of steam though the index was up 0.55%, while Chinese shares, gripped by domestic economic worries and Fed rate hikes, dipped 0.2%.

The Wall Street Journal reported on Thursday that Washington and Beijing are nearing an agreement that allows American accounting regulators to travel to Hong Kong to inspect audit records of U.S.-listed Chinese companies.

Oil rose on signs of improving fuel demand, although further gains were capped as the market awaited Powell's speech. [O/R]

Brent crude rose 1.4% to $100.69 per barrel and U.S. crude was also up by 1.4% to $100.61 a barrel.

Spot gold was traded at $1752 per ounce, down 0.36%. [GOL/]

(Editing by Sam Holmes and Kim Coghill)

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