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Stocks, bond yields dip as U.S. data muddies Fed rates outlook

Economy Dec 07, 2022 05:16PM ET
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© Reuters. FILE PHOTO: A view of a giant display of stock indexes, following the coronavirus disease (COVID-19) outbreak, in Shanghai, China October 24, 2022. REUTERS/Aly Song/File Photo
 
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By Herbert Lash and Danilo Masoni

NEW YORK/MILAN (Reuters) -World stocks slid further and Treasury yields dipped on Wednesday as U.S. worker productivity data beat forecasts but extended a weak trend, further muddying a debate on how far and how fast U.S. interest rates will rise.

Third quarter productivity rebounded at a slightly faster pace than initially thought. Economists said the reading pointed to elevated labor costs and inflation staying high, adding pressure on the Federal Reserve to keep raising rates.

But benchmark U.S. yields and the dollar both fell, suggesting lower rates ahead.

"Slower rate hikes have been the trend globally of late, but the Fed remains a wild card. Overall, it's a fickle, anxious market ahead of next week's Fed meeting," said Joe Manimbo, senior market analyst at Convera in Washington.

The S&P 500 and Nasdaq fell, adding to the prior day's sell-off on warnings by three major U.S. banks of a looming recession. Questions about how sticky inflation might be have raised uncertainty about the Fed's policy path as the pace of future inflation remains unknown.

"Looking back in previous decades of high levels of inflation, it usually takes a few years for inflation to moderate," said Chris Dyer, director of global equity at Eaton (NYSE:ETN) Vance in London.

MSCI's gauge of stocks across the globe fell 0.42%, while the broad European STOXX 600 index closed down 0.62% to mark its fourth straight decline as fears of a global recession intensified.

On Wall Street, the Dow Jones Industrial Average closed flat, while the S&P 500 lost 0.19% and the Nasdaq Composite dropped 0.51%.

Many in the market believe inflation is moderating and bond yields have peaked, allowing central banks to begin slowing rate hikes when policy-makers from the Fed, Bank of England and European Central Bank meet next week.

The Bank of Canada signaled on Wednesday that its historic tightening campaign was near an end as it raised benchmark overnight interest rates by 50 basis points to 4.25%, the highest level in almost 15 years.

Earlier, the Reserve Bank of India slowed the pace of rate increases with a 35 basis point hike of its key lending rate to 6.25%, but warned inflation could remain pervasive and elevated.

Fed Chair Jerome Powell also has warned the fight against inflation is far from over, but late last month he said the Fed could ease the pace of its rate hikes as soon as December.

Powell's comments have led the market to price in a lower peak interest rate, which Fed funds futures showed on Wednesday to be 4.918% next May, down from recent highs above 5.1%. Futures show the terminal rate at 4.419% in December 2023.

The yield on benchmark 10-year Treasury notes fell 9.2 basis points to an almost three-month low of 3.421%. But the inversion of two- and 10-year note yields, a recession harbinger, deepened at -84.5 basis points.

Gold prices rose, helped by a retreat in the dollar and Treasury yields, as investors anticipate the projection of slower rate hikes at the Fed's meeting on Dec. 13-14.

U.S. gold futures settled 0.9% higher at $1,798 an ounce.

The dollar slipped as traders weighed up an uncertain economic outlook, while China's yuan firmed as authorities loosened some of the country's zero-COVID rules.

The euro gained 0.37% to $1.0508, and the yen strengthened 0.44% to 136.45 per dollar.

China's national health authority said asymptomatic COVID-19 cases and those with mild symptoms can self-treat while in quarantine at home, the strongest sign so far that Beijing is preparing to live with the disease.

Market reaction was negative as the focus shifts to how well China can execute its policy shift.

"It is difficult to assume that China's reopening will not be inflationary when the opposite was true for the rest of the world and that will be the challenge heading into 2022," said Geoff Yu, strategist at BNY Mellon (NYSE:BK).

Oil slid to its lowest since the start of the year in volatile trading after U.S. government data showed an unexpectedly large build in fuel stocks, feeding fears about demand in a market already spooked by an uncertain economy.

U.S. crude fell $2.24 to settle at $72.01 a barrel, while Brent settled down $2.18 at $77.17.

Stocks, bond yields dip as U.S. data muddies Fed rates outlook
 

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Comments (11)
JIM VETTER
JIM VETTER Dec 07, 2022 5:10PM ET
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I have no doubt if the Fed does 50 bps next week, as everyone expects, the Markey markets will gap up like happy days are here again! Any excuse to pump, they'll do it.
amt hun
amt hun Dec 07, 2022 4:57PM ET
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Stocks AND bond yields dip. Meaning, stuff is being liquidated no matter which asset class. It is not recession time, it is creating-liquidity-for-Christmas time.
Kerry Ditto
Kerry Ditto Dec 07, 2022 11:18AM ET
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with us cutting interest rates now will stimulate supply chain along with china's plan to ramping up its supply efforts. it will induce massive supply-induced price cutting, thereby eliminate inflation problem. remember current inflation was caused mainly by suppy shortage shock.
JIM VETTER
JIM VETTER Dec 07, 2022 11:18AM ET
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interest rates do nothing about the supply side, it's directed at the demand side.
Kerry Ditto
Kerry Ditto Dec 07, 2022 10:47AM ET
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suddenly massive decline of T rates might suggest powell wants santa rally.
Hank Williams
Hank Williams Dec 07, 2022 9:56AM ET
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There is a huge disparity in educated men today and ten years ago putting pressure on inflation and it does not seem to be going away any time soon. Thank you video games.
Kerry Ditto
Kerry Ditto Dec 07, 2022 9:53AM ET
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cutting interest rates now would eliminate inflation.
Kerry Ditto
Kerry Ditto Dec 07, 2022 9:47AM ET
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massive santa rally appears brewing.
Kerry Ditto
Kerry Ditto Dec 07, 2022 9:31AM ET
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maybe powell wants to pause. T- bond rates falling like heavy rocks are the indication.
Robert Palumbo
Robert Palumbo Dec 07, 2022 7:23AM ET
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Again creative writting to stop the uptic. China Covid closing ending + then few days later the bad numbers from when it was closed come out and -
Tomas No
Tomas No Dec 07, 2022 3:52AM ET
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"Economic growth is slowing" So, bad news is good news for equities? Again, less hawkish FED signals will be expected.
 
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