Stocks slip, dollar gains on tighter policy outlook

© Reuters. FILE PHOTO: Passersby walk past an electric stock quotation board outside a brokerage in Tokyo, Japan, December 30, 2022. REUTERS/Issei Kato

By Herbert Lash

NEW YORK/LONDON (Reuters) -The dollar firmed and global equity markets fell on Friday as rising interest rates unsettled investors amid a growing chorus of central bank officials insisting monetary policy needs to remain tight for some time to lick inflation.

U.S. mega-cap growth companies came under pressure and shares of ride-hailing firm Lyft Inc (NASDAQ:LYFT) tumbled 36% after a downbeat forecast. In Europe, a dour outlook by Adidas (OTC:ADDYY) added to the downbeat mood that higher interest rates gave investors.

A sell-off in government debt set the day's tone. The yield on benchmark 10-year Treasury notes hit a more than one-month high and the 10-year German bund posted its biggest weekly rise this year as European Central Bank policymakers warned about inflation. Yields move opposite their price.

MSCI's U.S. central index of stock market performance in 47 countries shed 0.34%, while the dollar index rose 0.37%. Stocks on Wall Street ended mixed as many investors held out hope for a rate cut later this year and rising oil prices lifted energy shares.

"For all the enthusiasm or hopeful optimism that the (Federal Reserve) will be cutting rates by the end of the year, I'm skeptical that that's going to happen," said Michael Arone, chief investment strategist for the U.S. SPDR business at State Street (NYSE:STT) Global Advisors in Boston.

"The economy, earnings and potentially the labor market won't look so good as this year wears on and maybe into next year. That doesn't necessary translate into market losses," he said.

Broad disinflation has yet to start even if overall price growth has been in quick decline, ECB board member Isabel Schnabel said in a Twitter Q&A, the latest euro zone policymaker to say rates must rise further to combat inflation.

Fed officials said the same all week, as did policymakers in Australia, Sweden and Mexico as they, too, raised rates.

Michael James, managing director of equity trading at Wedbush Securities in Los Angeles, said the trend for stocks is still higher.

"Those with a longer-term view remain more bullish than you would expect from the Fed's hawkishness. The market is betting against the Fed being as hawkish as they continue to sound," he said.

The Dow Jones Industrial Average rose 0.5%, the S&P 500 gained 0.22% and the Nasdaq Composite dropped 0.61%, as it recorded its first weekly decline of the year.

The pan-European STOXX 600 index fell 0.96% as footwear maker Adidas warned of a potential loss this year for the first time in three decades. Shares lost 10.9%.

Futures now price the Fed's target rate to peak at 5.153% in July and stay above 5% from May to November, with only a slight decline to 4.862% in December. Before this week rates were seen much lower and suggested a Fed rate cut late this year.

U.S. monthly consumer prices rose in December instead of falling as previously estimated and data for the prior two months was also revised up, the Labor Department's annual revisions of consumer price index (CPI) data showed.

The yen broadly moved higher after reports that the Japanese government was set to appoint academic Kazuo Ueda as the central bank's next governor.

The Japanese yen strengthened 0.13% at 131.42 per dollar.

"The news surprised the market as he would bring a bit more of a hawkish tilt to monetary policy than the top contender, Masayoshi Amamiya," ING said in a note to clients, adding that the market reaction could prove "temporary."

In Europe, German government bond yields edged higher, with the 10-year bund hitting 2.377% before easing at session's end. The euro fell 0.57% to $1.0675.

Oil prices rose more than 2%, on track for weekly gains of more than 8%, as Russia announced plans to reduce crude production next month after the West imposed price caps on the country's fuel output.

U.S. crude futures settled up $1.66 at $79.72 a barrel, while Brent rose $1.89 to close at $86.39.

Gold inched higher while markets awaited next week's U.S. inflation data that could influence the Fed's rates policy.

U.S. gold futures for February delivery settled 0.2% lower at $1,874.50 per ounce.

Bitcoin fell 0.68% to $21,653.00.