These Charts Show How Global Markets Reacted to the Hawkish Fed

(Bloomberg) -- Federal Reserve Chairman Jerome Powell announced the first interest rate cut since the financial crisis yet struck a more hawkish tone at his press conference than expected, jolting markets.

Here is a look at how major asset classes reacted:

Dollar Jumps

The dollar extended gains in Asian trading as Powell warned against expecting a lengthy U.S. monetary easing cycle. The yen slipped, with the decline accelerating when it breached the closely watched level of 109 per dollar.

“Fed hawkishness may give the dollar a bid, but we argue for caution,” wrote Morgan Stanley analysts including Ellen Zentner in a note to clients. “Dollar strength exacerbates the issues that concern the Fed the most – global growth, trade, and inflation. The more cautious the Fed is on rate cuts, the higher the probability that financial conditions tighten, making future rate cuts more likely.”

Stocks Fall, Bonds Swing

U.S. stock futures initially fell close to 2%, before coming off their lows after Powell also said that he wasn’t ruling out a sequel to Wednesday’s cut. Treasury futures swung before eventually drifting lower.

“In the near term, markets may feel disappointed by the lack of Fed’s commitment to cut rates aggressively,” said Tai Hui, Chief Market Strategist, Asia Pacific, at JPMorgan Asset Management. “This was reflected by the 1.1% drop in S&P 500 index last night and small pick-up in 2-year Treasury yield. Equity markets also need to grapple with weak earnings as a result of shrinking profit margins, as well as aggressive earnings expectations for 2020.”

Benchmark Yields Fluctuate

Ten-year Treasuries surrendered gains made after the Fed’s meeting, where policy makers also brought forward their plan to abandon the run-down in the bond portfolio. The benchmark yield fluctuated, finishing the U.S. session lower before ticking higher in Asia.

“Powell’s latest comments certainly add to expectations the Fed will stay on pause in the September FOMC,” wrote Alvin Liew, senior economist at UOB. “We expect the Fed to go into a period of wait-and-see as more U.S. data becomes available, and then to follow up with another 25 basis points cut only in December.”

Yield Curve Flattens

The hawkish tone lifted yields at the front end of the Treasury curve -- two-year rates were up more than 11 basis points at one point -- and took the 2-year/10-year curve to its second-flattest level of the year.

“The markets have been removing some of the pricing for a series of cuts, as we know that there was about 100 basis points priced in for the next 12 months or so,” says Rajeev De Mello, chief investment officer at Bank of Singapore. “We’re also seeing the removal of that impacting the U.S. yield curve, which is now flatter.”

Modest Decline in Asia

In Asia, stocks slid by less than seen on Wall Street, with Japanese shares helped by the yen’s decline. Still, the MSCI Asia Pacific dropped to test it’s 50-day moving average, and remains in a longer-term downtrend.

--With assistance from Cameron Crise, Ruth Carson and Eric Lam.

To contact the reporter on this story: Cormac Mullen in Tokyo at cmullen9@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Joanna Ossinger, Andreea Papuc

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