The sharemarket is starting the week on the back foot as traders scramble to recalibrate their interest rate expectations for the United States after Federal Reserve chairman Kevin Warsh delivered a hawkish message to the market, vowing to stamp out inflation.
After a week of turmoil in the bond market that pushed yields to multi-decade highs, Warsh appeased investors on Friday (Saturday AEST) in his first major speech since taking the helm by reiterating that the world’s most influential central bank will return inflation to the 2 per cent target and if it doesn’t, policymakers “have work to do”.
Markets reacted swiftly to the speech at the annual symposium in Jackson Hole, with Wall Street selling off, the US dollar climbing, and yields for two-year Treasuries shooting up 11 basis points to 4.34 per cent as traders ramped up bets that the Fed will raise borrowing costs this year.
Warsh added that financial conditions were not currently restrictive, further fuelling expectations of an imminent rate rise, though the Fed chairman stopped short of signalling support for a rate increase next month.
“I stand here today committed to a discipline, not to a decision,” he told central bankers gathered for the event.
Even so, markets are now pricing in more than a 50 per cent chance of a rate increase at the Fed’s September 16 meeting – up from around 36 per cent before the speech – while pricing suggests at least one such move by the end of the year.
“He’s basically put a policy rate rise in the crosshairs,” said Stephen Miller, an investment strategy consultant to GSFM. “They have got to beat the inflation target, and it’s not trivial, and he doesn’t think that policy is restrictive.
“It’s going to be very difficult for them not to raise rates when they meet in September. If he doesn’t, Warsh is going to have to be extra careful about how he communicates that decision.”
On Wall Street, the S&P 500 Index erased earlier gains to finish the Friday session down 0.3 per cent, while the Nasdaq lost 0.5 per cent as the rate-sensitive tech sector sold off, led by the chipmakers.
The risk-off sentiment sent bitcoin down more than 3 per cent and dragged on ASX futures, which are pointing down 36 points, or 0.4 per cent, to 9009. A 3 per cent decline in the gold price to around $US4455.11 ($6217) an ounce will likely drag on the local mining sector on Monday.
Source: https://www.afr.com/markets/equity-markets/asx-to-retreat-as-fed-reserve-s-warsh-forces-pivot-on-interest-rates-20260830-p60sq6