US stocks remain lower after Federal Reserve minutes

US stocks remain lower after Federal Reserve minutes



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US stocks remained lower on Wednesday as investors assessed minutes from the Federal Reserve’s past meeting that showed officials expressed more scepticism over the need for further interest rate rises.

The S&P 500 was down 0.1 per cent and the tech-focused Nasdaq Composite was 0.3 per cent lower, following the release of the minutes, which said there were downside risks to raising rates much further in the central bank’s efforts to tame inflation. In July it lifted rates to their highest level in more than two decades.

In the minutes, Fed officials said it was “important” to “balance the risk of an inadvertent overtightening of policy against the cost of an insufficient tightening”.

Treasury yields remained higher after the minutes came out, with the yield on the two-year Treasury, which is sensitive to interest rate expectations, up 0.01 percentage points to 4.97 per cent. The yield on the 10-year note, which hit its highest level since November on Tuesday, rose 0.02 percentage points to 4.25 per cent.

The probability traders placed on the Fed holding the federal funds rate at its current level at its next gathering in September remained at 89 per cent after the minutes of the July meeting had been digested.

While the majority of market participants believe that the Fed’s historic tightening campaign is drawing to a close, there is less consensus on how long it will take before interest rates start to go down.

Shares of US retailer Target initially jumped more than 8 per cent, before halving its gains, after the retailer on Wednesday reported net income in the second quarter that surpassed Wall Street estimates. However, the company’s revenue fell from a year earlier — ending a six-year streak of growth, as a customer backlash in response to its Pride month merchandise and cautious consumer spending weighed on sales.

In Europe, the region-wide Stoxx Europe 600 ended the day 0.1 per cent lower, while London’s FTSE 100 gave up 0.4 per cent and France’s Cac 40 shed 0.1 per cent.

Investors in US and Europe generally remain concerned that sticky inflation could prompt central banks on both sides of the Atlantic to keep interest rates higher for longer.

Meanwhile, markets in Asia were overshadowed by more gloomy data from China, which signalled that new home prices declined 2.5 per cent month on month in July, following a 2.2 per cent fall in the previous month.

Hong Kong’s Hang Seng index slipped 1.4 per cent, nearing its lowest level since the start of the year, while China’s benchmark CSI 300 dropped 0.7 per cent.

Line chart of Hang Seng index showing Hong Kong stocks fall on weak Chinese economic data

China’s once-dominant property sector has battled with flagging demand as the economy struggled to rebound after three years of severe pandemic restrictions, driving large property developers into a debt crisis.

Declines in the property sector come at a time of heightened anxiety over China’s economic recovery after a number of data releases in preceding weeks signalled the country was slipping into deflation, while its consumer and business activity fizzled.

In an unexpected policy move a day earlier, the People’s Bank of China lowered its one-year, medium-term lending facility rate, which affects loans to financial institutions, in an effort to shore up growth.

Elsewhere in Asia, South Korea’s Kospi shed 1.5 per cent and Japan’s Topix lost 1.3 per cent.

In the UK, sterling edged 0.3 per cent higher against the dollar, trading at $1.2735, after data showed that the annual rate of UK inflation fell to 6.8 per cent in July, down from 7.9 per cent in June, while the core figure remained unchanged.

Yet analysts struggled to assess whether the data was enough to convince the Bank of England to ease its aggressive monetary tightening campaign anytime soon.

“We see today’s data as doing little to shift the needle for policymakers and continue to look for a final 25 basis point hike from the BoE in September,” said Nick Rees, FX market analyst at Monex Europe.


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