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US equities rose on Thursday even as the chair of the Federal Reserve reiterated hawkish rhetoric and the European Central Bank raised interest rates by 0.75 percentage points.
The S&P 500 stock index closed up 0.7 per cent in New York, while the technology-heavy Nasdaq Composite gained 0.6 per cent.
In bond markets, the yield on the two-year Treasury note added 0.05 percentage points to just under 3.5 per cent after Fed chair Jay Powell said the central bank needed to act “forthrightly” to ensure high inflation did not become entrenched.
Speaking at the Cato Institute think-tank’s annual monetary conference on Thursday, Powell said “we need to keep at it until the job is done”, fuelling expectations of a third consecutive 0.75 percentage point rise in US borrowing costs.
Eurozone bonds sold off after the ECB raised interest rates by 0.75 percentage points to 0.75 per cent, having lifted rates in July for the first time in more than a decade by 0.5 percentage points to zero.
Germany’s two-year Bund yield, which is sensitive to changes in interest rate expectations, jumped 0.22 percentage points to 1.29 per cent, and at one point touched 1.37 per cent, its highest level since 2011 according to Tradeweb data. The 10-year Bund yield, seen as a proxy for eurozone borrowing costs, added 0.14 percentage points to 1.71 per cent. Bond yields rise as their prices fall.
Rate-setters also committed to further rises in borrowing costs, underscoring the central bank’s determination to stamp out inflation ahead of economic growth.
“The rate hikes will further raise borrowing costs of peripheral countries and tighten financial conditions,” said Willem Sels, global chief investment officer at HSBC Private Banking, “which may deepen the recession.”
He added: “The ECB must have judged that this is the price to pay for crushing the inflation dragon.”
The ECB said on Thursday that inflation “remains far too high and is likely to stay above target for an extended period”.
ECB president Christine Lagarde reinforced this message at a press conference, saying that reaching the bank’s “neutral rate” would take “front-loading [and] further hikes in the next several meetings of a magnitude and pace that will be determined meeting by meeting and on the data we will receive”.
“We should not underestimate the importance of the signal, it’s a highly symbolic, if not historic, decision,” said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management. “There was never such a large move in rates. It’s a reflection of the change in the reaction [to inflation].”
Inflation reached a record 9.1 per cent in the eurozone in the year to August.
Europe’s Stoxx 600 closed up 0.5 per cent, retracing declines earlier in the session. London’s FTSE 100 added 0.3 per cent on the day that UK prime minister Liz Truss announced an estimated £150bn package to shield Britain from soaring energy prices.
In currencies, the euro slipped 0.3 per cent lower to trade just below parity with the dollar at $0.997. The pound also lost 0.3 per cent against the greenback to $1.149.
In Asian equity markets, Japan’s Topix closed up 2.2 per cent, while Hong Kong’s Hang Seng index slipped 1 per cent.
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