U.S. futures fall, dollar soars after Fed, BOE decision - what's moving markets

© Reuters

Investing.com -- U.S. stocks seen lower, while the dollar soars and U.S. bond yields head higher after the Federal Reserve suggested interest rates will stay higher for longer in the wake of its latest policy decision. The Bank of England faces a tricky rate decision, while the Swiss National Bank halted its rate-hiking cycle.

1. Fed turns more hawkish

The Federal Reserve held interest rates steady on Wednesday, as widely expected, but adopted a more hawkish stance, predicting that monetary policy will remain tighter through 2024 than previously expected.

Fed officials, as a whole, see the benchmark overnight interest rate peaking this year in the 5.50%-5.75% range, implying another hike of 25 basis points before the year’s end.

However, it’s next year that the U.S. central bank has really stiffened its stance, with its updated quarterly projections showing rates falling only 50 basis points in 2024 compared to the 100 bps of cuts suggested at the meeting in June.

In a response, Goldman Sachs now expects the Fed to begin its interest rate-cutting cycle in the fourth quarter of next year, later than an earlier forecast of a cut in the second quarter.

"Today, participants appeared to move away from the view that monetary policy tightening could weigh on growth with a long lag next year, which weakens one argument for cutting," Goldman Sachs economists led by Jan Hatzius said in a note.

"We think this means that inflation will have to fall further than we previously assumed for the FOMC to cut."

On the plus side, the Fed’s newest economic forecasts suggested economic growth would slow next year to about 1.5%, from 2.1% this year, an improvement from the predictions three months ago of just 1.1% growth next year, after just 1% this year.

2. Futures retreat after hawkish Fed stance

U.S. stock futures retreated early Thursday, adding to the previous session’s losses after the Fed signaled a higher for longer monetary policy, with one more interest rate hike likely this year.

At 04:40 ET (08:40 GMT), the Dow futures contract dropped 80 points, or 0.2%, S&P 500 Futures dropped by 17 points, or 0.4%, and Nasdaq 100 futures dropped 90 points, or 0.6%.

The main indices on Wall Street fell in the prior session, with the tech-heavy Nasdaq Composite index hit particularly hard, dropping 1.5%.

There is more economic data for investors to digest Thursday, with weekly jobless claims and the Philadelphia Fed manufacturing index due before the opening bell, and existing home sales later in the session.

Earnings are due from Darden Restaurants (NYSE:DRI), owner of the Olive Garden and other chains, and the retail pharmacy chain Rite Aid (NYSE:RAD).

Additionally, FedEx (NYSE:FDX) stock soared over 5% premarket after the delivery company lifted its annual earnings guidance, while marketing automation firm Klaviyo (NYSE:KVYO) slipped premarket after a strong debut on Wednesday.

3. Finely balanced BOE call

The central bank focus now turns to Europe, with no less than four of the region's biggest central banks meeting today, highlighted by the Bank of England’s get together.

Sweden’s Riksbank and the Norges Bank hiked interest rates as expected, while the Swiss National Bank kept its main policy rate unchanged at 1.75%, ending its run of five consecutive increases since it began lifting rates out of negative territory in June 2022.

The Bank of England was also widely tipped to tighten monetary policy at the start of the week, but Wednesday's surprise fall in British inflation has made this decision a finely balanced call on whether to hike or skip.

The U.K. headline consumer price index sank to an 18-month low of 6.7% in August, while core inflation, which excludes volatile food and energy prices, fell sharply to 6.2% from 6.9% in July.

"Thursday's Bank of England meeting just got a lot more interesting," James Smith, an economist at ING, said. "It's a very close call, but we're still tempted to say the Bank will follow through with a hike."

However, if the BOE does lift interest rates later Thursday, this increase is likely to the last for some time.

4. Dollar soars, U.S. yields at 2008 highs

The dollar soared to fresh highs and U.S. Treasury yields hit multi-year peaks in the wake of the Federal Reserve’s meeting, with Fed Chair Jerome Powell flagging at least one more interest rate hike this year.

At 04:40 ET (08:40 GMT), the dollar index, which measures the currency against a basket of rivals, rose 0.4% to 105.174, having earlier climbed as high as 105.68, its strongest since early March.

The 10-yearbenchmark soared to a 15-year high, while 2-year yields jumped to their highest levels since early-2001.

“This hawkish hold may well keep the dollar bid into October and it will have to be softer U.S. activity data – particularly a rise in jobless claims or a decline in consumer confidence and retail sales – which will be required to soften up the dollar,” said analysts at ING, in a note.

“Dollar bears will get no joy from the Fed.”

5. Oil falls sharply after Fed meeting, crude stockpiles

Oil prices dropped sharply Thursday, pulling further back from recent highs after the Fed’s warning on higher U.S. interest rates raised concerns of a further hit to economic activity, potentially denting crude demand.

Data from the U.S. Energy Information Administration, released on Wednesday, showed crude inventories fell just over 2 million barrels last week, well short of the 5.25 million barrel drop the industry body American Petroleum Institute had reported a day earlier.

The Fed’s hawkish stance also led to the U.S. dollar surging to its highest since early March, making commodities such as oil which are denominated in dollars more expensive for buyers using other currencies.

By 04:40 ET, the U.S. crude futures traded 1.4% lower at $88.44 a barrel, while the Brent contract dropped 1.4% to $92.27.

The benchmarks are extending losses into a third straight session after soaring to 10-month highs earlier in the week on expectations of tight supply.