World shares decline after Fed warns of higher rates to come

BANGKOK (AP) — Shares skidded in Europe and Asia on Thursday after a retreat on Wall Street by investors dismayed over the Federal Reserve’s warning that still more interest rate hikes are in store following its latest increase.

Oil prices fell and U.S. futures also dropped.

The declines followed the U.S. Federal Reserve’s hike in its key short-term rate by half a percentage point, the seventh increase this year. The Bank of England and European Central Bank were expected to follow suit Thursday with increases of their own.

The U.S. was due to release Thursday its weekly report on unemployment benefits, along with retail sales data for November — U.S. consumer spending and employment remain strong, hindering the Fed’s fight against inflation, but helping protect the slowing economy from a possible recession.

Germany’s DAX sank 0.9% to 14,332.15 while the CAC 40 in Paris gave up 1.2% to 6,650.67. Britain’s FTSE 100 was down 0.7% at 7,446.68.

The future for the S&P 500 was down 0.8% while that for the Dow Jones Industrial Average dropped 0.6%.

On Wednesday, the S&P 500 lost 0.6% and the Dow industrials shed 0.4%. The Nasdaq composite gave back 0.8% while the Russell 2000 index lost 0.7%.

Japan reported its trade deficit surged to over 2 trillion yen ($15 billion) in November as higher costs for oil and a weak yen combined to push imports higher. It was the 16th straight month of red ink and a record high for the month of November.

Also Thursday, the Asian Development Bank downgraded its forecasts for developing economies in Asia, putting growth for the region at 4.2% this year and 4.6% in 2023. The earlier forecasts had put 2022 growth at 4.3% and 2023’s expansion at 4.9%.

The update forecast a 3% expansion for China, the world’s second-largest economy, in 2022, with growth in 2023 expected to rise to 4.3% as stringent pandemic restrictions are eased.

In Asian trading, Tokyo’s Nikkei 225 lost 0.4% to 28,051.70 and the Hang Seng in Hong Kong sank 1.6% to 19,368.59. The Kospi in Seoul gave up 1.6% to 2,360.97.

The Shanghai Composite index gave back 0.3% to close at 3,168.65 and Australia’s S&P/ASX 200 shed 0.6% to 7,204.80.

Shares fell in Taiwan and Bangkok but rose in Mumbai.

The U.S. central bank’s increase in its key short-term rate by 0.50 percentage points Wednesday was expected. It was its seventh hike this year, and the Fed said it expects rates to climb higher in coming years than it had anticipated.

“The Fed did not welcome the disinflation trends that have just started to emerge and focused on robust job gains and elevated inflation. Any hopes of a soft landing disappeared as the Fed seems like they are committed to taking rates much higher,” Edward Moya of Oanda said in a commentary.

Wednesday’s hike was smaller than the previous four 0.75 percentage point increases and takes the federal funds rate to a range of 4.25% to 4.5%, the highest level in 15 years. It followed an encouraging report showing that inflation in the U.S. slowed in November for a fifth straight month, to 7.1%.

Fed policymakers forecast that the central bank’s rate will reach a range of 5% to 5.25% by the end of 2023.

Recent signs that inflation has eased had stoked optimism that the Fed might signal the possibility of rate cuts in the second half of next year. But Fed Chair Jerome Powell emphasized that the full effects of the central bank’s efforts to slow the economy to bring down inflation have yet to be fully felt.

The Fed plans to hold rates at a level high enough to slow the economy “for some time” to ensure inflation really is crushed. Projections released Wednesday did not include any rate cuts in 2023.

“I wouldn’t see the committee cutting rates until we’re confident that inflation is moving down in a sustained way,” Powell said.

The Fed did signal it expects its rate to fall to 4.1% by the end of 2024 and 3.1% by late 2025.

In other trading Thursday, U.S. benchmark crude gave up 60 cents to $76.68 per barrel in electronic trading on the New York Mercantile Exchange. It gained $1.89 to $77.28 a barrel on Wednesday.

Brent crude, the pricing basis for international trading, shed 51 cents to $82.19 per barrel.

The U.S. dollar rose to 136.76 Japanese yen from 135.46 yen. The euro fell to $1.0614 from $1.0682.