Friday 21:00 BST. US and European stocks gained ground while Treasury yields and the dollar steadied at the end of a volatile week dominated by a significant shift in expectations for the timing of the next rise in US interest rates.
Oil prices were also in the spotlight this week as Brent crude rose to within a whisker of the $50 a barrel mark as bullish commentators highlighted recent supply disruptions and growing demand.
But it was US monetary policy that really grabbed the headlines as hawkish comments from Federal Reserve officials and the minutes of the central bank’s April meeting emphasised that a rate rise this summer remained a distinct possibility.
Indeed, the minutes showed that most policymakers felt a June increase would be “appropriate” if economic data and job market conditions continued to strengthen and inflation moved towards the Fed’s 2 per cent target.
Against that backdrop, comments on Thursday from William Dudley, president of the New York Fed, were viewed as significant by market observers.
“Seen as having views closely aligned to those of Fed chair [Janet] Yellen and usually leaning towards slightly dovish of centre in nature, Mr Dudley opined that ‘if I’m convinced that my own forecast is on track, then I think a tightening in the summer, the June-July timeframe, is a reasonable expectation’,” noted Jim Reid, macro strategist at Deutsche Bank.
“He did cite risks from the timing of the UK EU referendum in the context of the meeting next month but the overall takeaway was one of a feeling of continuing the recent party line of talking up market expectations closer to that of the Fed.”
Fed fund futures moved to price in a 51 per cent probability of a 25 basis point rate rise at or before the central bank’s July meeting, according to Bloomberg calculations, with the chances of a June move seen at about 30 per cent. At the start of this week, the markets were pricing in just a 4 per cent probability of a rise next month.
Michael Hanson, US economist at BofA-Merrill Lynch, said that, more generally, the market had repriced higher the path of Fed policy rates.
“This likely was the intent of recent Fed communications after the minutes revealed that Fed officials worried market pricing was ‘unduly low’,” Mr Hanson said.
He noted speculation that the Fed might refrain from raising rates should the dollar again strengthen sharply in anticipation of a move.
“We don’t find that argument compelling,” he said. “We still expect a very gradual hiking cycle and with it limited dollar appreciation.”
And the dollar’s gains following the release of the minutes were relatively muted. The dollar index, a measure of the currency against a weighted basket of peers, was a fraction higher in late trade on Friday at 95.35, compared with 94.55 at the close of trade on Tuesday, the day before the minutes were released.
For the week, the index managed a rise of 0.8 per cent, touching a two-month high in the process, while the euro fell 0.8 per cent over the five days to $1.1215 and dollar/yen rose 1.4 per cent to ¥110.15.
The rise in the dollar helped push gold down $2 on Friday to $1,252 an ounce, leaving it $21 down over the week and heading for its worst weekly showing in more than two months.
The yield on the two-year US Treasury note, which is particularly sensitive to shifts in perception of Fed policy, was flat on Friday at 0.88 per cent — up 13bp on the week but off a two-month peak of 0.92 per cent hit on Thursday.
As well as the potential of a strong dollar act as a deterrent to the Fed, some in the markets highlighted the possibility of sharp falls for equity prices to stay the US central bank’s hand.
After initially holding steady in the aftermath of the minutes’ release, the S&P 500 came under pressure on Thursday and the index touched a two-month low and closed in negative territory for the year.
On Friday, however, the US stock benchmark bounced 0.6 per cent to 2,052, for a 0.3 per cent gain over the week.
Across the Atlantic, the Euro Stoxx 600 index rose 1.2 per cent on Friday for a five-day gain of 1 per cent. Tokyo outperformed as the yen retreated with the Nikkei’s 0.5 per cent rise on Friday leaving it with a gain of 2 per cent for the week.
Oil was a key driver of equity markets in the early part of the week as Goldman Sachs’ upbeat comments on the short-term outlook for crude helped drive Brent to a six-month high of $49.85 a barrel.
On Friday, Brent settled at $48.72, down 0.2 per cent on the day but still up 1.9 per cent on the week.
For market updates and comment follow us on Twitter @FTMarkets
Get alerts on Central banks when a new story is published