The dollar rose and equity markets slid on Thursday after hawkish remarks from Federal Reserve officials reminded investors a less aggressive monetary policy is unlikely with U.S. employment data still showing a tight labor market.
Nagging recession and higher interest rate worries also rattled European markets, and the pound tumbled as Britain hoped to put its disastrous recent fiscal experiment behind it with a more austere-looking budget.
Markets fell in Eueope, as early optimism about Siemens' (SIEGn.DE) earnings waned and doubts arose that the European Central Bank might slow rate hikes soon. More talk from Fed officials that rates are not high enough to tame inflation-pressured equities.
"The narrative has quickly shifted to perhaps a more moderate path to inflation next year and what would happen if there's a meaningful slowdown in growth and a recession," said Subadra Rajappa, head of U.S. rates strategy at Societe Generale in New York.
The Fed needs to continue raising rates by at least another full percentage point, as hikes so far "have had only limited effects on observed inflation," said James Bullard, president of the St. Louis Fed.
Using even "dovish" assumptions, a basic monetary policy rule would require rates to rise to at least around 5%, while stricter assumptions would recommend rates above 7%, Bullard said at an economic event in Louisville, Kentucky.
Market expectations for the Fed's peak terminal rate in May and June edged above 5%. But by the end of 2023 the market is pricing in a terminal rate that declines to 4.555% on expectations growth will slow with inflation.
Minneapolis Fed President Neel Kashkari said rate hikes should continue until it is clear inflation has peaked.
MSCI's gauge of stocks across the globe (.MIWD00000PUS) shed 0.65% while the pan-European STOXX 600 index (.STOXX) lost 0.42%, but was up 3.9% for the month due to better-than-feared earnings despite worries of a recession in the eurozone.
On Wall Street, the Dow Jones Industrial Average (.DJI) fell 0.02%, the S&P 500 (.SPX) lost 0.31% and the Nasdaq Composite (.IXIC) dropped 0.35%, spurred by fears the Fed would over tighten.
U.S. data showed unemployment benefits claims fell last week, indicating the labor market is still tight.
Expectations of higher rates strengthened the dollar, which plunged 3.7% last week.
The euro fell 0.26% to $1.0365, and the yen weakened 0.45% versus the dollar to 140.19.
Sterling $1.1866, slid 0.35% on the day after the new British government delivered a new budget plan of 55 billion pounds ($64.93 billion) of tax rises and spending cuts.
Concerns about the economic outlook deepened the inverted yield curve, suggesting investors are braced for recession but also anticipating lower rates on longer-dated securities, said Joe LaVorgna, chief U.S. economist at SMBC Nikko Securities in New York.
"What the market seems to be telling us is that inflation is going to be a lot lower going forward, that's because economic growth is going to weaken and take pricing power down with it," he said.
The yield on benchmark 10-year Treasuries has fallen more than 50 basis points since peaking at 4.338% a month ago. The two-year's yield has remained far higher.
The spread between yields on two- and 10-year Treasury notes, often seen as a recession harbinger, deepened to -68.9 basis points, as the yield on 10-year notes rose 7.9 basis points to 3.773%.
"The slope of the yield curve is telling us the Fed is going to make a policy pivot," LaVorgna said.
Oil fell more than 3% as mounting COVID-19 cases in China and the likelihood of U.S. interest rate hikes weighed on demand.
U.S. crude futures fell $3.95 to settle at $81.64 a barrel. Brent settled down $3.08 at $89.78.
U.S. gold futures settled down 0.7% to $1,763 an ounce.
Bitcoin fell 0.13% to $16,632.00.