Stocks uneasy in case Powell embraces his inner hawk

[June 21, 2023]  By Wayne Cole and Lawrence White

SYDNEY/LONDON (Reuters) - Stocks slipped on Wednesday on negative news including a lack of new stimulus from Beijing, bearish British inflation data and a further slump in European real estate, as markets await direction from Federal Reserve Chair Jerome Powell.

The world's most powerful central banker faces lawmakers in two days of testimony and is sure to be questioned on whether rates will really rise again in July and peak in a 5.5%-5.75% range as projected.

Markets have their doubts and currently imply around a 78% chance of a hike to 5.25-5.5% next month, with that likely being the end of the entire tightening cycle.

"The focus is on whether the July meeting is truly 'live' and if the Fed dot plot of two more hikes is a true base case depending on the data, or doom-mongering on inflation in an effort to ensure no premature easing in financial conditions," said Tapas Strickland, head of market economics at NAB.

The uncertainty nudged S&P 500 futures and Nasdaq futures down 0.1%, following a 0.2% dip in Europe's benchmark STOXX index and a 1% fall in MSCI's broadest index of Asia-Pacific shares outside Japan.

The U.S. dollar was firmer ahead of Powell's key congressional testimony, with the dollar index up 0.1% at 102.62.

BRITAIN: INFLATION NATION

Elsewhere in currencies, the battered Japanese yen won some respite as risk aversion prompted profit-taking on very crowded short positions. The currency has been falling for weeks as the Bank of Japan (BOJ) doggedly defended its super easy policies.

Minutes of the central bank's last meeting showed just one of nine board members suggested reconsidering its policy of keeping bond yields low, and even then suggested it was best to wait a while.

That lack of urgency should limit any bounce in the yen and kept the dollar underpinned at 141.80 yen, only just off Tuesday's seven-month high of 142.26.

A man wearing a protective face mask walks past the London Stock Exchange Group building in the City of London financial district, whilst British stocks tumble as investors fear that the coronavirus outbreak could stall the global economy, in London, Britain, March 9, 2020. REUTERS/Toby Melville/FILE PHOTO

The euro, likewise, steadied at 154.78 yen, not far from its recent peak of 155.37.

The single currency was flat on the dollar at $1.0916, while sterling firmed slightly as hotter-than-expected inflation data raised expectations of bigger central bank rate hikes.

Investors ramped up their bets on the Bank of England raising rates by a hefty half a percentage point, after data showed inflation defied expectations that it would slow and held at 8.7% in May.

That pushed interest rate futures to suggest a roughly 45% chance of a punchy 50 basis point hike to the base rate, up from a 25% chance as of Tuesday.

The latest figures make British inflation the highest of any major advanced economy once again, and sent the domestically focused FTSE 250 index down 0.9% to its lowest level in 11 weeks.

Housebuilders declined 3% at one point as the prospect of more rate hikes raised fresh concerns about mortgage costs.

Rising interest rates and higher bond yields have been a burden for gold which was pinned at $1,934 an ounce, just above last week's three-month low of $1,924.99. [GOL/]

Oil prices edged higher after a couple of sessions of losses, still struggling with concerns about Chinese demand absent a sizable stimulus package. [O/R]

Brent added 32 cents to $76.22 a barrel, while U.S. crude rose 35 cents to $71.54.

(Reporting by Wayne Cole and Lawrence White; Editing by Jacqueline Wong, Lincoln Feast and Alex Richardson)

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