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Short-dated government bond yields in the United States and
Europe are heading back up and bullish stock markets are
starting to feel, well a little bit less bullish.
While the Fed was widely expected to, and did, keep rates
unchanged, the U.S. central bank left the door open to more
increases ahead.
Analysts at BNY Mellon noted that Fed projections – both the
projected level of the funds rate and the sheer number of
members that saw higher rates – was much more hawkish than
expected.
And so to the ECB, which is all but certain to raise borrowing
costs to their highest level in 22 years on Thursday.
It's also tipped to leave the door open to more hikes, extending
its fight against high inflation even as the euro zone economy
flags.
For markets, hopeful that the run of rate hikes would soon pave
the way for a pause in increases and for easing later this year
as growth slows, disappointment is sure to follow.
Or perhaps not? Even after the more hawkish message from the Fed
on Wednesday, market pricing for the rate trajectory has not
changed too much.
Money markets price in roughly one more 25 basis point rate
increase from the Fed, while the ECB may struggle to sound
hawkish while inflation in the bloc is coming down.
Perhaps that helps explain why the euro has edged off one-month
peaks hit on Wednesday near $1.0865.
ING analysts reckon the euro/dollar exchange rate now faces some
"moderate downside risks."
Key developments that should provide more direction to U.S.
markets later on Thursday:
* ECB rate decision at 1215 GMT
* US June Philly Fed index, May retail sales, industrial
production data due out
(Reporting by Dhara Ranasinghe; Editing by Jane Merriman)
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