Friday 18:45 GMT
A keenly awaited speech by Janet Yellen, chair of the Federal Reserve, had little lasting impact on markets as participants remained cautious at the end of a week in which US stocks hit record peaks, yields on shorter-dated Treasuries reached seven-year highs and the dollar rose to its strongest since mid-January.
Following a dramatic repricing of the chances of a US interest rate rise this month, gold was on course for its biggest weekly decline in four months.
Oil prices rallied but were still down from a week ago amid persistent concerns about record-high levels of US crude inventories.
A week that began with President Donald Trump’s address to Congress on Wednesday at the top of the market agenda saw the focus rapidly shift to the outlook for official US borrowing costs.
Janet Yellen, Fed chair, on Friday added to expectations that US interest rates would rise this month as she predicted that the pace of tightening was likely to accelerate in 2017 as the central bank sought to keep the economy from overheating.
CME Group’s FedWatch Tool put the probability of a 25 basis point US rate rise this month at 81 per cent, compared with about 30 per cent a week ago.
“There is no doubt that this week’s main story has been the big rates repricing,” said Craig Nicol, macro strategist at Deutsche Bank.
“President Trump’s speech was hotly anticipated and closely watched but ultimately has still left many questions unanswered. Instead markets have been busy scurrying to reassess Fed tightening expectations following a chorus of hawkish Fed commentary over the last few days.”
Indeed, the huge shift in Fed rhetoric caught many by surprise, particularly given the cautious tone of the minutes of the central bank’s last Open Market Committee meeting, released last week, which underlined the huge uncertainty among policymakers about President Trump’s mooted fiscal stimulus.
Analysts at Rabobank highlighted that the apparent change to the Fed’s thinking between the January 31-February 1 meeting and this week had taken place without any major change in the economic data.
“This looks to be a case of the Fed either no longer being prepared to wait for clarity on the fiscal stimulus outlook, or wanting to grab an opportunity [to tighten] while one presents itself,” said Rabo’s Michael Every.
The heightened Fed expectations had a marked impact on the fixed income and foreign exchange markets.
The yield on the monetary policy-sensitive two-year US Treasury note touched 1.341 per cent on Friday — the highest since mid-2009 — up 1bp on the day and a hefty 19bp higher for the week. The 10-year US yield was up 1bp at 2.50 per cent and up 18bp for the five-day period.
Other “core” government bond markets took their cue from the US. The 10-year German Bund yield rose 5bp to 0.36 per cent, leaving it 17bp higher for the week.
Additional selling pressure on German debt — prices move inversely to yields — came from the release of robust eurozone headline inflation data and purchasing managers’ indices this week.
The week’s currency market action was firmly centred on the dollar. On Thursday, the US unit hit its highest level against a basket of peers since January 11, although it subsequently eased back slightly.
On Friday, the euro was up 0.5 per cent at $1.0554 — well off a high of $1.0630 struck on Monday — while the dollar was 0.1 per cent firmer versus the yen at ¥114.54, and on track for its highest finish for five weeks.
The Mexican peso was 2 per cent stronger against the dollar after US Commerce Secretary Wilbur Ross told CNBC that the beleaguered currency could rally if a new US/Mexico trade deal was reached and an FX support mechanism put in place.
Wall Street showed few signs of discomfort at the prospect of a March move by the Fed.
All of the main US equity gauges hit record highs on Wednesday with the Dow Jones Industrial Average piercing the 21,000 level and the S&P 500 enjoying its best day since just before the US election last November.
It was thus no surprise to see US stocks subsequently come off the boil. On Friday, the S&P was down 0.1 per cent at2,378 in early afternoon trade in New York — 0.7 per cent below its record finish but still up 0.5 per cent for the week. The Dow was flat on the day at 21,008 and the Nasdaq Composite was also 0.1 per cent lower.
Across the Atlantic, the pan-European Stoxx 600 index fell 0.1 per cent but registered a weekly gain of 1.4 per cent. The Topix index in Tokyo eased 0.4 per cent but, again, was up 0.5 per cent for the week.
In Asia, Japan’s Topix fell 0.4 per cent and Hong Kong’s Hang Seng lost 0.7 per cent, while materials and energy stocks pushed Australia’s S&P/ASX 200 0.8 per cent lower.
China’s Shanghai Composite was down 0.3 per cent, while the technology-focused Shenzhen Composite added 0.2 per cent.
Gold was a notable casualty this week as its $8 fall on Friday to $1,226 an ounce left it $30 weaker for the five days.
Brent oil was up 1 per cent at $55.61 a barrel but down 0.7 per cent over the week.
Additional reporting by Peter Wells in Hong Kong
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