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Stocks Drop as Fed Signals Steeper Path for Rates: Markets Wrap

A pedestrian checks a mobile device while standing on Wall Street near the New York Stock Exchange (NYSE) in New York, U.S., on Friday, June 1, 2018. Stocks rallied and bonds fell as the latest U.S. jobs data bolstered optimism in the economy, all but solidifying a rate hike later this month. Photographer: Michael Nagle/Bloomberg

(bloomberg)

(Bloomberg) -- U.S. stocks finished lower as the Federal Reserve struck a somewhat hawkish tone in its latest policy statement. Treasuries fell, while the dollar retreated after spiking to session highs. Other major currencies fluctuated as investors absorbed the first of three big central bank reports this week.

The Federal Open Market Committee on Wednesday raised rates and signaled it may pick up the pace of increases this year as unemployment falls and inflation flirts with target levels. Ten-year Treasury yields briefly crossed the 3 percent threshold after the announcement. The S&P 500 Index closed near its low for the day.

“The FOMC is now signaling two more hikes this year and has dropped its increasingly stale signal to markets that rates will remain for some time below those levels expected in the long term,” James McCann, global economist at Aberdeen Standard Investments, said in a note. “This shift reflects the robust domestic growth backdrop, which is being fermented by a late-cycle fiscal stimulus.”

Fed Chairman Jerome Powell told reporters that unemployment and inflation are both low, and that raising rates too slowly or quickly could be harmful. He added that the bank won’t over-react to inflation levels above 2 percent. Powell also announced he would hold press conferences at every Fed meeting starting in January.

The euro dropped after the Fed decision only to recover to session highs. The pound also erased losses from a post-Fed swoon. The European Central Bank will decide rates on Thursday -- no change is expected but investors will be braced for news on a potential end to the region’s quantitative-easing program. The Bank of Japan reports Friday.

“From the ECB standpoint, the gross numbers in 2018 are not as good as the numbers were in 2017,” John Lynch, chief investment strategist for LPL Financial, said by phone. “So I’m wondering if it’s impatience on the part of investors as opposed to a fundamentally driven necessity to remove accommodation.”

Gold and copper advanced, while Bitcoin looked headed for a fourth straight day of declines. West Texas crude jumped after EIA reported an unanticipated draw on U.S. oil supplies.

Earlier, technology companies outperformed as the Stoxx Europe 600 Index advanced, though gains were tempered by a decline in telecom shares. In Asia, Japanese shares rose as the yen fell slightly, while equities fell in Hong Kong and Australia. Chinese shares also retreated, with ZTE Corp. plunging by its daily limit after it agreed to a $1 billion fine.

These are some key events to watch this week:

  • The European Central Bank rates decision comes Thursday with a briefing from President Mario Draghi.
  • The Bank of Japan June monetary policy decision and news conference is Friday.
  • FIFA expects more than 3 billion viewers for the World Cup that begins this week in Russia.

And these are the main moves in markets:

Stocks

  • The S&P 500 Index fell 0.4 percent as of 4 p.m. New York time.
  • The Stoxx Europe 600 Index climbed 0.2 percent to the highest in more than two weeks.
  • The U.K.’s FTSE 100 Index declined less than 0.05 percent.
  • Germany’s DAX Index gained 0.4 percent to the highest in almost three weeks.

Currencies

  • The Bloomberg Dollar Spot Index declined 0.1 percent, its biggest drop in a week.
  • The euro gained 0.4 percent to $1.1779.
  • The British pound gained less than 0.05 percent to $1.3376.
  • The Japanese yen advanced 0.1 percent to 110.30 per dollar.

Bonds

  • The yield on 10-year Treasuries rose one basis point to 2.97 percent, the highest in more than two weeks.
  • Germany’s 10-year yield declined one basis point to 0.48 percent.
  • Britain’s 10-year yield fell three basis points to 1.369 percent, the lowest in more than a week.

Commodities

  • West Texas Intermediate crude jumped 0.5 percent to $66.69 a barrel.
  • Gold gained 0.3 percent to $1,300.19 an ounce.
  • LME copper advanced 0.5 percent to $7,257 a metric ton.

--With assistance from Andreea Papuc, Richard Jones and Samuel Potter.

To contact the reporters on this story: Sarah Ponczek in New York at sponczek2@bloomberg.net;Janine Wolf in New York at jwolf71@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Andrew Dunn

©2018 Bloomberg L.P.

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