Dollar Climbs, Bonds Slide as Fed Sees 2017 Hike: Markets Wrap

  • Central bank will start balance-sheet runoff in October
  • 10-year yield nears 2.30%, gold futures test $1,300 level

Fed Plans Balance-Sheet Unwind in October

Treasuries tumbled while the dollar surged after the Federal Reserve struck a more hawkish tone than markets anticipated. U.S. stocks were little changed.

Bloomberg’s dollar index rose after the central bank set an October start for shrinking its balance sheet and maintained a forecast for another rate increase this year. The 10-year Treasury yield approached 2.30 percent. The S&P 500 Index dipped below 2,500 before ending at a fresh record, as banks rallied on the prospect for higher rates. A slump in Apple Inc. dragged tech shares lower. Gold futures fell.

While policy makers left the benchmark interest rate unchanged, markets showed a hawkish reaction to officials’ forecast for where rates will be at the end of the year. U.S. central bankers are counting on steady growth and low unemployment to raise inflation closer to their goal, which would support their policy of gradual tightening through interest-rate increases and a reversal of quantitative easing.

“Catching the equity market off guard was the dot plot indicating that 12 of the 16 voting members project a December rate hike,” said Quincy Krosby, Chief Market Strategist at Prudential Financial.“There remains an ongoing tug of war between those who think the economy is still too weak to handle another rate hike versus those who say that financial conditions and a strengthening global economy warrant the move towards rate normalization.”

Elsewhere, Spanish assets showed resilience even as the government cracked down on an illegal separatist referendum planned in its largest economic region. the New Zealand dollar jumped after a poll put the ruling National Party back in the lead ahead of the main opposition Labour Party ahead of this weekend’s election. And the fixing of the yuan remained in focus as investors try to gauge where the People’s Bank of China wants the currency. Read more about the importance of the fixings here.

Terminal subscribers can read more in our Markets Live blog.

What to watch out for this week:

  • The Bank of Japan is predicted to stand pat when it reviews policy Thursday.
  • Brexit strategy is in focus as Theresa May prepares to outline her revised approach on Friday.
  • Campaigning continues in Germany, days before the Sept. 24 election. New Zealand goes to the polls on Sept. 23.

Here are the main moves in markets:

Stocks

  • The S&P 500 Index rose 0.1 percent to 2,508.19 as of 4 p.m. in New York. The index closed at an all-time high, but hasn’t moved more than 0.3 percent for five sessions.
  • Financial shares rose 0.6 percent while shares in consumer staple producers fell 0.9 percent and tech shares lost 0.5 percent.
  • The Stoxx Europe 600 Index fell less than 0.1 percent.
  • The MSCI All-Country World Index lost 0.2 percent after earlier touching a record high.
  • The MSCI Emerging Market Index was little changed.

Currencies

  • The Bloomberg Dollar Spot Index surged 0.5 percent.
  • The yen slid 0.5 percent to 112.16 per dollar.
  • The euro dropped 0.9 percent to $1.1885.

Bonds

  • The yield on 10-year Treasuries advanced two basis points to 2.27 percent, the highest since July.

Commodities

  • Gold futures dropped 0.5 percent to $1,304.30 an ounce.
  • West Texas Intermediate crude advanced 1.9 percent to settle at $50.41 a barrel, the highest in more than seven weeks.

— With assistance by Sophie Caronello, and Craig Torres

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