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Dow Futures Slide, Dollar Surges as Fed Tees-Up Tapering, 2023 Rate Hikes

Federal Reserve Chairman Jerome Powell isn't afraid to 'talk about' taking about tapering now that growth and inflation are likely to run hot this year and his colleagues are forecasting rate hikes in 2023.

The Thursday Market Minute

  • Global stocks retreat from record highs as a surprisingly hawkish Fed meeting tees-up the prospect of near-term tapering and earlier-than-expected rate hikes.
  • Fed Chair Jerome Powell says taper talk will now take place at each future meeting, but vowed to signal changes to the $120 billion pace of monthly purchases, as the economy continues its post-pandemic rebound.
  • Inflation will likely run hot this year, at 3.5%, before easing into 2022, but the so-called 'dot plots' suggest two rate hikes the following year as the recovery takes hold and employment nears full capacity.
  • Benchmark 10-year note yields leap the most since early March to 1.57% while the dollar index gains the most in more than a year to trade at 91.668 against a basket of its global peers.
  • CDC data shows 146.5 million Americans have now been fully vaccinated against the coronavirus, with around 312.9 million doses administered as of Wednesday.
  • U.S. equity futures suggest a weaker open on Wall Street after weaker-than-expected weekly jobless claims data and an in-line Philly Fed index.

U.S. equity futures traded lower Thursday, while the dollar extended its biggest gains in more than a year and Treasury yields surged, following a Federal Reserve meeting that signaled earlier-than-expected interest rate hikes and set up the possibility of a near-term tapering of its monthly bond purchases. 

Economic projects from Fed governors -- which are seen as a signal, but not a commitment -- to future policy moves suggest the central bank will lift rates twice in 2023 now that vaccine rollouts have spurred job growth and inflation is likely to run at a hotter-than-expected pace between now and the end of the year.

While not a 'volte-face' for a Fed that has preached the 'transitory' nature of recent price rises, the introduction of a 2023 tightening cycle caught markets by surprise, particularly given the fact the Fed Chairman Jerome Powell also indicated that he and his colleagues would 'talk about' when to signal a slowdown in the $120 billion a month pace in monthly bond purchases now that the economy is likely to grow 7% this year and inflation will average around 3.5%, before pressures ease in 2022.

As if to underscore the Fed's caution on labor markets, however, weekly jobless claims for the period ending June 12 rose to 412,000, although the four-week average remains in a downward trajectory at 395,000.

"The Fed is in uncharted territory and is playing both sides: sticking with their transitory narrative but addressing inflationary pressures by moving up the timing on fed funds increase," said Jamie Cox, managing partner for Harris Financial Group. "Markets will need a few days to digest this information before settling out."

Bond markets were probably the most notable mover, with benchmark 10-year Treasury note yields rising 9 basis points, the most since early March, to trade at 1.57%. The dollar index, meanwhile, added 0.55% to trade at 91.635 in overnight trading following yesterday's jump in the wake of the surprisingly-hawkish Fed statement. 

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And with European stocks snapping a nine-day winning streak, the longest in three years, and Asia falling to a three-week low, U.S. markets are looking to extend declines heading into the Thursday session, with futures contracts tied to the Dow Jones Industrial Average indicating a 125 point opening bell decline.

Futures tied to the S&P 500, meanwhile, are priced for an 18 point pullback while those linked to the Nasdaq Composite index are indicating an 80 point retreat. 

Ford  (F) - Get Report shares were one of the most active pre-market stocks, rising 2.4% to $15.38 each after the carmaker said its second quarter earnings would be "significantly higher" than last year.

U.S. airline stocks were also notable pre-market movers, with American Airlines  (AAL) - Get Report falling 0.4% and Delta Air Lines Group  (DAL) - Get Report slipping 0.5% amid reports from the website tracking group Downdetector of Thursday outages in many of the carriers' main internet portals.

Southwest Airlines  (LUV) - Get Report, which suffered a similar issue Wednesday, was little-changed at $56.67 each. 

The stronger dollar ate into oil prices gains in overnight trading, although demand prospects remain firm in the wake of Energy Department data showing a bigger-than-expected 7.4 million barrel decline in domestic  crude stocks for the week ending June 11.

Brent crude contracts for August delivery, the global benchmark, slipped 48 cents from Wednesday's close in New York to trade at $73.89 per barrel while WTI crude was marked 36 cents lower at $71.76 per barrel.