Stocks ease, dollar perks up as focus returns to Fed and inflation

Global stocks eased on Wednesday, while the dollar pulled further above last week’s one-year lows, as investor focus honed in on what the Federal Reserve may have to do to tame inflation, rather than on the recent problems in the US banking sector.

The MSCI All-World index (.MIWD00000PUS) fell 0.2%, thanks to a broad-based decline in equities around the world. S&P 500 and Nasdaq 100 futures, fell between 0.3-0.5%, suggesting a touch of weakness at the opening bell, reported Reuters.

Tesla reports earnings later in the day, as does Morgan Stanley (MS.N), on the heels of solid earnings at rivals that seem to have soothed some concern about the sector’s stability.

“So far the major banks that have reported have largely helped to settle market nerves,” said Khoon Goh, head of Asia research at ANZ in Singapore. “With those stresses easing away, markets are now back to focusing on the Fed.”

A slew of Fed speakers are in the frame over the rest of this week ahead of the pre-meeting blackout period that begins on the weekend.

The Fed’s “beige book” of economic conditions is published on Wednesday and appearances are due from Chicago Fed President Austan Goolsbee and New York Fed President John Williams.

Markets are pricing an 86% chance the Fed raises rates by 25 basis points (bps) at the May meeting, and are winding back expectations of cuts later in the year - moves that have put the brakes on US dollar selling.

In an interview with Reuters on Tuesday, St Louis Fed President James Bullard said that, far from pausing, the central bank should keep raising interest rates, based on how persistent inflation has proven to be.

Still, the inversion between three-month Treasury yields and 10-year yields , at more than 160 bps, is the deepest since 1981 when the Fed funds rate was retreating from peak of 19% - suggesting markets expect rates to fall.

Ten-year yields were last up 5 bps at 3.6176%. Earnings seasons is underway in earnest in Europe too.

Dutch-listed chip equipment maker ASML - one of the region’s most valuable companies by market capitalisation - beat first-quarter profit expectations, according to Refinitiv data.

Shares in the company fell 2.4%, which in turn contributed to a 0.2% drop in the STOXX 600 (.STOXX) index.

As investors consider the possibility that the Fed may well have to raise rates even more, the US dollar has found some support, but data shows the pressure is also on other central bankers.