By Herbert Lash and Huw Jones
NEW YORK/LONDON (Reuters) -Treasury prices and a gauge of global equities rebounded on Friday after sharp sell-offs earlier this week following the U.S. Federal Reserve’s warning that rates will stay higher, a message many in the market find at odds with its soft landing forecast.
Fed policymakers raised the U.S. central bank’s forecast for its overnight lending rate by 50 basis points to 5.1% in 2024, but also lifted its outlook for economic growth. Yet higher rates typically crimp bank loans and raise the cost of credit.
“Keeping rates at this level or slightly above this level for an extended period of time, none of that lines up,” said Marvin Loh, senior global macro strategist at State Street in Boston.
“Certainly they wanted send the message that higher is going to be around for longer and they went all-in on the soft landing. There’s some inconsistencies associated with that.”
MSCI’s U.S.-centric gauge of global equity performance and stocks on Wall Street bounced back while the dollar and Treasury yields, which move inversely to price, retreated. The benchmark 10-year note eased from 16-year highs of more than 4.5%.
The two-year Treasury yield, which reflects interest rate expectations, fell 3.6 basis points to 5.112%.
In a sign of slowing growth, a flash reading of S&P Global’s U.S. Composite PMI index showed U.S. business activity basically at a stand still in September, with the vast services sector essentially idling at the slowest pace since February.
The initial reassessment of the Fed’s higher-for-longer policy drove the rise in Treasury yields and created headwinds for risk assets, including equities, credit and emerging markets, but supported the dollar.
MSCI’s all-world country index for stocks gained 0.37%, but the pan-European STOXX 600 index fell 0.39%.
On Wall Street, the Dow Jones Industrial Average rose 0.17%, the S&P 500 gained 0.53% and the Nasdaq Composite added 0.83%.
In currency markets, the dollar pared gains against a basket of currencies after the flash PMI, but remained 0.10% higher at 105.48.
The yen traded at 148.155 to the dollar after falling sharply earlier following the Bank of Japan’s decision to hold interest rates in negative territory, suggesting it was in no rush to phase out its massive stimulus program.
Oil prices rose as renewed global supply concerns from Russia’s fuel export ban countered demand fears driven by macroeconomic headwinds and higher interest rates.
U.S. crude futures CLc1> rose 0.79% to $90.34 per barrel and Brent was at $93.77, up 0.5% on the day.
In sharp contrast with the U.S. economy, the euro zone economy will likely contract in the third quarter and won’t return to growth anytime soon, HCOB’s flash purchasing managers’ index showed, hitting the euro and yields.
MSCI’s index of Asia-Pacific shares ex-Japan touched a 10-month low before bouncing to trade up 0.9% on vows in China to support private business. It is down 2.8% this week.
Japan’s Nikkei pared losses of as deep as 1% to trade 0.5% lower.
Ten-year Japanese government bond futures rallied though cash yields were little changed and near decade highs at 0.745%.
Investors were still digesting a slew of policy decisions from major central banks during the week.
Central banks in Sweden and Norway announced 25 bp hikes with the prospect of more to come.
Yet the Bank of England, in a split decision, left rates on hold for the first time in nearly two years, sending sterling to a six-month low, while the Swiss franc fell sharply after a surprise hold on rates from the Swiss National Bank.
“It’s a lot of mixed messages and stories, and often you get those around turning points,” said Craig Ebert, senior economist at BNZ in Wellington.
In emerging markets, Indian bonds and the rupee rallied after JPMorgan said it would add Indian debt to its widely tracked emerging markets index, setting the stage for billions of dollars in foreign inflows.
Gold prices edged higher, helped by a slight pullback in the dollar and bond yields as investors mulled the Fed’s hawkish stance and waited for comments from policymakers for clues on the rate outlook.
Spot gold rose 0.3% to $1,924.60 per ounce, following three sessions of losses.
(Reporting by Huw Jones, additional reporting by Tom Westbrook; Editing by Marguerita Choy and Rashmi Aich)
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