Stocks tumble, U.S. bond yields rise on strong jobs report

By Chuck Mikolajczak

NEW YORK (Reuters) – A gauge of global stocks dropped more than 1%, while U.S. Treasury yields and the dollar rose on Friday after a shockingly strong U.S. jobs report renewed concerns the Federal Reserve may remain aggressive in its path of interest rate hikes as it tries to tame inflation.

The report from the Labor Department showed nonfarm payrolls surged by 517,000 jobs in January, well above the 185,000 estimate of economists polled by Reuters, with data for December also being revised higher. Average hourly earnings increased 0.3%, as expected, down from the 0.4% in the prior month, while the unemployment rate of 3.4% was the lowest since 1969.

Equities have rallied to start the year on expectations the Fed may be forced to pause or even pivot from its rate hikes in the back half of the year, growing more confident after comments from Fed Chair Powell on Wednesday that acknowledged the “disinflationary” process may have begun. Additional fuel was added after policy announcements by the European Central Bank (ECB) and Bank of England (BoE) on Thursday.

“While it is very helpful to see the jobs increasing, it is really a horse race between that ongoing income and how quickly inflation comes down,” said Lisa Erickson, head of public markets group at U.S. Bank Wealth Management in Minneapolis, Minnesota.

“The Fed really is in a tough place trying to navigate between keeping those price pressures down and not causing too much economic pain.”

Interest rate futures now indicate the Fed is likely to deliver at least two more rate hikes, taking the benchmark rate to above 5%.

U.S. stocks closed lower, with additional downward pressure being supplied by a 2.75% decline in Google parent Alphabet and an 8.43% drop in Amazon after their quarterly results.

Apple, however, helped prevent further declines, as the stock erased losses in premarket trading to close 2.44% higher following its quarterly earnings.

Earnings are now expected to decline 2.7% for the quarter from the year-ago period, according to Refinitiv data, down from the 1.6% fall expected at the start of the year.

Other data showed the U.S. services industry rebounded strongly in January, according to the Institute for Supply Management (ISM).

The Dow Jones Industrial Average fell 127.93 points, or 0.38%, to 33,926.01; the S&P 500 lost 43.28 points, or 1.04%, to 4,136.48; and the Nasdaq Composite dropped 193.86 points, or 1.59%, to 12,006.96.

Even with Friday’s declines, both the S&P 500 and Nasdaq notched weekly gains, with the Nasdaq securing a fifth straight week of gains, its longest since October-November 2021.

European stocks closed modestly higher, erasing earlier declines on optimism over the region’s economy. The pan-European STOXX 600 index rose 0.34%, but MSCI’s gauge of stocks across the globe shed 1.08%. The STOXX index closed with a 1.23% gain on the week, its highest closing level since April 21. MSCI’s index was on track for a second straight weekly advance even with Friday’s tumble.

U.S. Treasury yields climbed after the payrolls report, with those on the benchmark 10-year note up 13 basis points to 3.528%, from 3.398% late on Thursday, poised for their biggest one-day jump since Oct. 19.

The greenback strengthened in the wake of the data, climbing off a nine-month on Thursday to hit 103.01, its highest since Jan. 12, as the dollar index rose 1.149% and the euro was down 1.02% to $1.0799.

The Japanese yen weakened 1.90% to 131.18 per dollar, while Sterling was last trading at $1.2053, down 1.39% on the day.

Crude prices turned lower in part due to strength in the dollar and concerns about higher interest rates, with Brent and WTI both dropping nearly 8% on the week.

U.S. crude settled down 3.28% at $73.39 per barrel and Brent settled at $79.94, down 2.71% on the day.

(Reporting by Chuck Mikolajczak; additional reporting by Herbert Lash; Editing by Kirsten Donovan and Jonathan Oatis)

Treasury Yields Soar after US Non-Farm Payrolls Trounce Forecasts

Treasury yields and the U.S. Dollar are moving higher while stocks and gold are sharply lower after the employment picture started off 2023 on a surprisingly strong note, with Non-Farm Payrolls posting their strongest gain in six months.

Non-Farm Payrolls increased by 517,000 for January, above the Reuters estimate of 185,000. The previous month’s number was also revised higher to 260,000.

Meanwhile, the unemployment rate fell to 3.4% versus the estimate for 3.6%. The prior month was 3.5%.

Average Hourly Earnings rose 0.3% as expected, but the December figure was revised higher to 0.4%. On a year-over-year basis, average hourly earnings were 4.4% versus 4.3% expected. Last month, they came in at 4.6%.

According to the government’s report, growth across a multitude of sectors helped propel the massive beat against the estimate.

Leisure and hospitality added 128,000 jobs to lead all sectors. Other significant gainers were professional and business services (82,000), government (74,000) and health care (58,000).

Market Reaction

U.S. Treasury yields rose Friday after jobs data came in much better than expected.

The 10-year Treasury yield was up about 7 basis points at 3.467%. The 2-year Treasury was up around 11 basis points to 4.197%.

According to CNBC, “The data underscored the stickiness of the labor market. The Fed has been trying to cool the economy through monetary policy measures, including interest rate hikes. At the conclusion of its latest meeting on Wednesday, the central bank increased rates by 25 basis points, but also said it was starting to see a slight slowdown of inflation.

For a look at all of today’s economic events, check out our economic calendar.

S&P 500 Rallies after Powell Remarks Amid Increasing Bets on Lower Inflation Risks

The major U.S. stock indices soared on Wednesday, reversing earlier weakness after the Federal Reserve raised its target interest rate by the expected 25 basis points but comments from Chairman Jerome Powell were interest as less-hawkish by investors.

On Wednesday, the blue chip Dow Jones Industrial Average settled at 34096.06, up 6.92 or +0.02%. The benchmark S&P 500 Index finished at 4119.21, up 42.61 or +1.05% and the technology-driven NASDAQ Composite closed at 11816.32, up 231.77 or 2.0%.

Prices Fall after Fed Hikes Benchmark Rate as Expected

In its monetary policy statement, released along with the interest rate hike, Fed policymakers said the U.S. economy was enjoying “modest growth” and “robust” job gains, with policymakers still “highly attentive to inflation risks” as it seeks to tighten financial conditions and reign in high prices.

Stocks Rebound after Powell Fails to Spook Investors with Higher Rate Hike Remarks

Despite the Federal Reserve’s aggressive rate hiking campaign, the central bank has more work to do, according to Fed Chair Jerome Powell. He said the central bank could conduct a few more rate hikes to bring inflation down to its target range. He also added that inflation is easing in some areas of the economy but it’s too early for the Federal Reserve to say the battle’s been won, said Fed Chair Jerome Powell.

But those hawkish comments failed to scare investors, who have been pricing in the possibility of a rate cut by the Fed in the back half of the year.

This is where the disparity between the market and the Fed begins.

Powell said he doesn’t expect the Fed to cut rates this year. “Given our outlook, I don’t see us cutting rates this year, if our outlook comes true,” the Fed chair said.

Powell also said he was “not concerned” about the bond market implying one more cut before a pause, because some market participants are expecting inflation to fall faster than the Fed does.

“If we do see inflation coming down much more quickly, that will play into our policy setting, of course,” Powell said.

Bullish Price Action Suggests investors Believe Fed May Be Nearing End of Rate Hike Cycle

It may not have been bullish sentiment, a less-hawkish Powell or for that matter a more-dovish Powell that fueled Wednesday’s massive turnaround. It may have been that investors believe all the chatter means that the Fed is nearing the end of its interest rate hiking cycle.

Whether it’s in March at 4.75% that investors believe, or in June at 5.00% or higher that Fed policymakers have been preaching, investors believe the end is near.

Inflation Will Ultimately Determine When the Fed Stops Hiking Rates

Clearly investors like the long side at this time amid their interpretation of how fast inflation is falling and how quickly the Fed will reach its terminal rate or begin cutting interest rates. This means the market will continue to be data dependent.

Traders will be watching Friday’s Non-Farm Payrolls report closely for further signs of weakening in the labor market, but next week’s consumer inflation report will ultimately determine if inflation is on a path toward the Fed’s mandated 2% level.

We may be moving toward that level, but we’re not close enough for the Fed to be comfortable. Furthermore, any uptick in inflation and the current rally could come crashing down.

For a look at all of today’s economic events, check out our economic calendar.

Stocks gain, yields dip after U.S. data; Fed eyed

By Chuck Mikolajczak

NEW YORK (Reuters) – A gauge of global stocks advanced on Tuesday as it closed out a strong month while U.S. Treasury yields fell as investors assessed economic data and earnings reports ahead of a run of central bank policy announcements.

On Wall Street, U.S. stocks rallied and closed higher, reversing declines in equity futures after data showed labor cost growth in the fourth quarter was the smallest in a year, at 1.0%, even in a tight labor market. Other data showed consumer confidence eased in January, as inflation expectations for the next 12 months climbed to 6.8% from 6.6% last month.

The Federal Reserve is widely expected to raise interest rates by 25 basis points (bps) at the conclusion of its two-day policy meeting on Wednesday. Investors will closely monitor comments from Fed Chair Jerome Powell following the announcement for clues on the path of monetary policy.

“Especially ahead of a Fed press conference, something like this equity market rally is kind of explicitly against what they want, and they have been pretty clear the market rallying on what they expect the Fed to do is counter-productive,” said Ross Mayfield, investment strategist at Baird in Louisville, Kentucky.

“We do feel like we’ve gotten a bit ahead of ourselves here even if we are closer to the end of the Fed hiking cycle than the beginning.”

The Dow Jones Industrial Average rose 368.95 points, or 1.09%, to 34,086.04, the S&P 500 gained 58.83 points, or 1.46%, to 4,076.6, and the Nasdaq Composite added 190.74 points, or 1.67%, to 11,584.55.

The S&P 500 closed up 6.2% for the month, its first January gain since 2019, while the Nasdaq surged 10.7% for its biggest percentage gain for the month of January since 2001.

Interest rate announcements from the Bank of England and the European Central Bank are scheduled for Thursday, with both seen as likely to hike rates by 50 basis points.

Markets will also grapple with a host of U.S. economic data this week, culminating in Friday’s payrolls report for January. Investors see signs of weakening in the labor market as a key factor in bringing down high inflation. Other data this week include gauges of the manufacturing and services sectors.

In addition, more than 100 S&P 500 companies, including market heavyweights Apple Inc , Amazon.com Inc and Google parent Alphabet, are scheduled to report results this week.

Despite the strong equity rally, Caterpillar and McDonald’s both lost ground on Tuesday following their quarterly results. However, Exxon Mobil rose after posting a $56 billion net profit for 2022.

European shares retreated ahead of the central bank meetings to end the month on a down note, but still notched their biggest January percentage gain since 2015. Economic data for the euro zone showed slight growth for the fourth quarter, but further weakness is expected this year.

The pan-European STOXX 600 index lost 0.26%, and MSCI’s gauge of stocks across the globe gained 0.72%. MSCI’s index was on pace for its biggest January percentage gain since 2019.

Benchmark U.S. 10-year notes were down 3.5 basis points to 3.516% in the wake of the data, after hitting a two-week high of 3.574% on Monday.

In currencies, the U.S. dollar index, poised for a fourth month of declines, fell 0.176%, with the euro up 0.22% to $1.0868.

Oil prices recovered from earlier lows, as U.S. crude settled up 1.2% at $78.87 per barrel and Brent settled at $84.49, down 0.48% on the day.

(Reporting by Chuck Mikolajczak; additional reporting by Lisa Pauline Mattackal; editing by Diane Craft, Leslie Adler and Deepa Babington)

Bond investors brace for recession as Fed expected to slow pace of tightening

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) – Recession worries are sending investors into Treasuries and other fixed income investments ahead of the Federal Reserve’s first meeting of 2023, even as stocks start the year with a hopeful rally. Yields on the benchmark U.S. 10-year Treasury note, which move inversely to prices, have fallen by around 83 basis points from their October high of 4.338% and investors sent $4.89 billion into U.S. bond funds last week, the third straight week of net inflows. The rally comes after Treasuries notched the worst year in their history following the Fed’s most aggressive monetary policy tightening since the 1980s. Worries that the Fed’s rate increases will send the U.S. economy into a recession have been a key driver of demand for Treasuries, often seen as a safe haven during economically uncertain times. While investors widely expect the Fed to raise rates by another 25 basis points at the end of its monetary policy meeting on Feb. 1, markets are also looking for signals that the central bank is pulling back on its hawkish monetary policy amid signs of falling inflation and softness in the economy.

“Things are coming off the boil here,” said Rob Daly, director of fixed income at Glenmede Investment Management. “There is a de-risking that’s happening, and we’re seeing flows out of equities into higher quality parts of the market such as fixed income.” That move has stood in contrast to a recent rally in stocks, where recession concerns are less apparent and hopes of a so-called soft landing, where inflation eases and growth remains resilient, have emerged.

The S&P 500 has risen 4.6% year-to-date and the Nasdaq Composite is up nearly 9% in a rebound that has lifted many of the names that were beaten down in last year’s equity rout.

Some equity investors are nevertheless playing it safe, expecting the current rally in stocks to wilt if a recession hits. U.S. equity funds have witnessed outflows for ten straight weeks, even as indexes charge higher, with investors pulling some $1.14 billion in the latest week, according to Refinitiv Lipper data. Phil Orlando, chief equity strategist at Federated Hermes, is sitting in Treasuries, cash and other defensive investments in anticipation of a reversal in the current rally in stocks. “Our sense is that stocks are (going)lower and we need to maintain a defensive posture,” he said.

CAUTIOUS STANCE

The Fed has projected it will raise its key policy rate to between 5% and 5.25% and keep it there at least until the end of the year, an outlook many investors fear will make a recession all but inevitable or exacerbate an economic downturn. The rate currently stands between 4.25% and 4.50%. For now, many investors are wedded to a more dovish view, betting that policymakers will blink if growth starts to slow. Futures markets show expectations of rates peaking at around 4.93% and falling in the latter half of the year.

Solidifying expectations of a more dovish Fed would, in theory, cap views for how high rates will rise and bolster the case for bond yields to move lower.

“My bet is on a recession,” said Ellis Phifer, managing director, fixed income research, at Raymond James. “The Fed is closer to the end than the beginning, and rates usually fall across the curve when the Fed is finished raising rates.”

Of course, some investors are happy to take the central bank at its word and are betting rates stay higher for longer.

BlackRock, the world’s largest asset manager, wrote on Monday it believes the disconnect will resolve in favor of higher rates, as global central banks “overtighten policy because they’re worried about the persistence of underlying core inflation.”

Strategists at the firm recommended short-term government bonds, high-grade credit and agency mortgage-backed securities.

Recessions are typically called in hindsight by the National Bureau of Economic Research (NBER) and few investors believe the U.S. economy is currently experiencing one. Yet weaker consumer spending, a drop in manufacturing activity, and layoffs in the technology industry have been cited as evidence of a looming downturn. Bruno Braizinha, director, U.S. rates strategy at BofA Securities in New York, said he has seen a pick-up in demand for Treasuries, reflecting “a more cautious view for the outlook.” BofA’s core view is a recession in the second half with job losses as well, he added. “So I don’t find it unreasonable that the market is pricing cuts in late-2023.”

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Ira Iosebashvili and Nick Zieminski)

S&P 500 Index Called Lower after PCE Price Index Meets Expectations

The U.S. personal consumption expenditures (PCE) price index edged up 0.1% last month after a similar gain in November. In the 12 months through December, the PCE price index increased 5.0% after advancing 5.5% in November.

Excluding the volatile food and energy components, the PCE price index rose 0.3% after climbing in November. The so-called core PCE price index rose 4.4% on a year-on-year basis in December after increasing 4.7% in November.

The Fed tracts the PCE price indexes for monetary policy. Other inflation measures have also slowed down significantly.

Impact on Fed Policy

The Fed last year raised its policy rate by 425 basis points from near zero to a 4.25%-4.50% range, the highest since late 2007.

Financial markets have priced in a 25-basis point rate increase at the central bank’s Jan. 31-Feb 1 meeting, according to the CME’s FedWatch Tool.

Although today’s PCE Index data only matched expectations on a monthly basis with its 0.1% rise, it probably wasn’t enough to derail expectations for a 25-basis point rate hike. However, when combined with yesterday’s robust GDP data, it could mean that the Fed will probably have to keep rates higher for longer.

Benign Market Reaction

The reaction to the PCE price index report was subdued. Treasury yields, which were higher ahead of the release of the report and stayed there. The U.S. Dollar is inching higher against a basket of currencies and Comex gold futures are trading flat.

Stock futures are edging lower ahead of the cash market opening, however, the benchmarks are still higher for the week.

For a look at all of today’s economic events, check out our economic calendar.

Stocks, dollar gain on soft landing hopes

By Herbert Lash

NEW YORK (Reuters) -Global stock markets rallied and the dollar strengthened on Thursday after a slew of data showed a strong U.S. economy that is decelerating with slowing inflation, giving credence to the Federal Reserve’s desire to engineer a soft landing.

Gross domestic product increased at a faster-than-expected 2.9% annual rate in the fourth quarter of last year as consumers boosted spending on goods, the U.S. Commerce Department said.

Inflation data improved too, as personal consumption expenditures growth slowed to 2.1% year over year from 2.3% in the prior quarter while the GDP price index decelerated to 3.5%.

But the Fed’s hefty interest rate hikes last year eroded demand and slowed growth toward the end of 2022, posing tough choices for U.S. central bank policymakers as they contemplate how much higher rates need to go when they meet next week.

MSCI’s all-country world index, a gauge of stocks in 47 countries, rose 0.90% to hit a fresh five-month high, while the dollar index rose 0.246%.

“The market is pricing in a Fed pivot where they actually cut rates by the end of the year,” said James Ragan, director of wealth management research at DA Davidson in Seattle, adding Fed Chair Jerome Powell is unlikely to indicate any move next week.

“What Powell has pushed back on a lot is to not really think about lowering rates at all,” Ragan said. “But they are willing to pause and hold rates at a high level for a certain period of time.”

Futures are pricing a 94.7% probability of a 25 basis points hike next Wednesday and see the Fed’s overnight rate at 4.45% by next December, or lower than the 5.1% rate Fed officials have projected into next year on market expectations of a rate cut.

Treasury yields rose as the resilient economy strengthened the case for the Fed to maintain its hawkish stance in coming months as it seeks to cool inflation.

The yield on 10-year Treasury notes was up 3.6 basis points to 3.498% and the gap between yields on three-month Treasury bills and 10-year notes, seen as a recession harbinger, narrowed to -117.9 basis points.

“On balance, the data being better than expected suggests there’s more resilience in the economy than many have given it credit,” said Joe Manimbo, senior market analyst at Convera in Washington. “The fact that inflation figures in the Q4 data moderated suggests it’s a Goldilocks scenario.”

The Dow Jones Industrial Average rose 0.61%, the S&P 500 gained 1.10% and the Nasdaq Composite added 1.76%. In Europe, the broad STOXX 600 index closed up 0.42%.

While talk of recession likely is overdone, the market is not cheap, said David Bahnsen, chief investment officer at private wealth manager The Bahnsen Group in Newport Beach, California.

“Investors should not assume that the easy times in the market are coming back,” he said. “I don’t think people should be in a hurry to go back to excessive risk.”

Overnight in Asia, equities rose to a seven-month high, with Hong Kong shares playing catchup to other markets’ gains as trade resumed after a three-day Lunar New Year holiday.

MSCI’s broadest index of Asia-Pacific shares outside Japan climbed 1.1% and was set for its fifth straight day of gains.

Oil prices rose more than 1% on Thursday on expectations demand will strengthen as top oil importer China reopens its economy and on positive U.S. economic data.

U.S. crude futures settled up 86 cents at $81.01 a barrel, and Brent rose $1.35 to settle at $87.47.

Gold edged down after the strong U.S. data. Indications of a likely slowdown limited losses in the safe-haven asset.

U.S. gold futures settled down 0.7% at $1,930.

(Reporting by Herbert Lash, additional reporting by Huw Jones in London, Ankur Banerjee; editing by Nick Macfie, Elaine Hardcastle, Sharon Singleton and Jonathan Oatis)

Treasury yields fall after U.S. data, stocks decline

By Caroline Valetkevitch

NEW YORK (Reuters) – U.S. 10-year Treasury yields fell to a four-month low on Wednesday as data showed U.S. retail sales declined more than expected in December, while the yen was weaker against the dollar in the wake of the Bank of Japan’s decision to maintain ultra-low interest rates.

Wall Street stocks ended lower following profit-taking after recent gains, with hawkish comments from Federal Reserve officials adding to the day’s bearishness. A global stocks index also fell.

Some investors said the drop in U.S. retail sales, together with subsiding inflation, could encourage the Fed to further scale back the pace of its interest rate increases next month.

A separate report showed U.S. producer prices also fell more than expected in December.

Even as inflation was showing signs of cooling, Fed policymakers reiterated their support for hiking the U.S. central bank’s target interest rate above 5%.

The U.S. central bank is expected to raise rates by 25 basis points when it concludes its two-day meeting on Feb. 1.

Earlier, the Bank of Japan maintained its ultra-easy policy, including a bond yield cap, defying market expectations it would phase out its massive stimulus program because of increasing inflation pressures.

The decision caused the yen to fall, with investors unwinding bets based on expectations the central bank would overhaul its yield control policy.

In late-afternoon U.S. trading, the dollar was up 0.6% against the yen. The U.S. dollar index was nearly flat.

On Wall Street, the Dow Jones Industrial Average fell 613.89 points, or 1.81%, to 33,296.96, the S&P 500 lost 62.11 points, or 1.56%, to 3,928.86 and the Nasdaq Composite dropped 138.10 points, or 1.24%, to 10,957.01.

“The market was overbought,” said Sam Stovall, chief investment strategist at CFRA research. He said some investors took profits in areas of recent strong gains.

The pan-European STOXX 600 index rose 0.23% and MSCI’s gauge of stocks across the globe shed 0.71%.

In other currencies, the Australian dollar fell 0.7% to US$0.6936, after hitting its highest level since August last year. The New Zealand dollar traded flat on the day at US$0.6430.

Benchmark 10-year notes fell as low as 3.372%, the lowest since Sept. 13. Two-year yields reached 4.072%, the lowest since Oct. 4. The yield spread between two-year and 10-year notes was last a minus 70 basis points.

In the energy market, oil prices fell as worries about a possible U.S. recession outweighed optimism over China’s lifting of COVID-19 curbs.

Brent futures fell 94 cents, or 1.1%, to settle at $84.98 a barrel. U.S. West Texas Intermediate (WTI) crude fell 70 cents, or 0.9%, to settle at 79.48.

Bitcoin was last down 1.8%.

(Reporting by Caroline Valetkevitch in New York; Additional reporting by Sinead Carew in New York and Nell Mackenzie and Alun John in London; Editing by Sharon Singleton and Matthew Lewis)

Stock Traders Are Cautious After CPI Report

Key Insights

  • Inflation Rate declined from 7.1% to 6.5%, in line with analyst expectations. 
  • Gold made an attempt to settle above the $1900 level. 
  • S&P 500 moved lower as stock traders expected that inflation would fall below analyst estimates. 

Inflation Data Met Analyst Expectations

Today, traders will stay focused on the CPI data from the U.S., which will serve as the key driver for markets.

U.S. reported that Inflation Rate declined from 7.1% in November to 6.5% in December. Core Inflation Rate decreased from 6% to 5.7%. Both reports met analyst expectations.

The reports indicated that inflation continued to slow down. Importantly. Core Inflation Rate fell in line with the analyst expectations. Fed’s interest rate hikes have already put material pressure on inflation.

Inflation Rate is declining for a sixth month in a row, after peaking at 9.1% in June. Core Inflation Rate is decreasing for a third month in a row, after peaking at 6.6% in September.

U.S. Dollar Fell To New Lows

The FedWatch Tool indicates that there is a 91.7% probability of a 25 bps rate hike at the next Fed meeting. The market expects that federal funds rate will peak at 475-500 bps. According to market’s expectations, the Fed will not be able to push rates above the 5.00% level. Traders also believe that the Fed will start cutting rates in November 2023.

Market’s expectations are more dovish compared to the recent signals from Fed speakers. According to Fed speakers, the Fed may push rates above the 5.00% level and will not cut rates this year.

The U.S. dollar fell to multi-month lows against a broad basket of currencies. The U.S. Dollar Index made an attempt to settle below the 103.30 level.

Treasury yields moved lower after the release of inflation data but lost momentum and rebounded towards pre-report levels.

The weak dollar provided material support to gold, which tested new highs at $1901.

Interestingly, S&P 500 pulled back at the start of the trading session. It looks that stock traders expected that inflation would be below analyst expectations.

For a look at all of today’s economic events, check out our economic calendar.

Treasury Yields Dip after CPI Report Shows Inflation Declined in December

The financial markets led by U.S. Treasury yields are being whipped around on Thursday following the release of a government report that showed consumer prices fell 0.1% in December, in line with expectations from economists.

The Labor Department reported that inflation finished 2022 with a modest pullback with consumer prices posting their biggest monthly decline since April of 2020.

On a monthly basis, the consumer price index (CPI), which measures the cost of a broad basket of goods and services, fell 0.1% in December, in line with the Dow Jones estimate. That move equated to the largest month-over-month decrease since April 2020 when much of the country was in lockdown due to government COVID restrictions.

Despite the monthly decline, headline CPI still rose 6.5% annually, bringing attention to the persistent burden that the rising cost of living has placed on U.S. households. Nonetheless, the figures represented the smallest annual increase since October 2021.

Excluding volatile food and energy prices, so-called Core CPI rose 0.3%, also meeting the forecast. It was up 5.7% from a year ago, once again in line.

For a look at all of today’s economic events, check out our economic calendar.

Stocks rally, bond yields fall with bets on easing U.S. inflation

By Sinéad Carew and Huw Jones

NEW YORK/LONDON (Reuters) – The S&P 500 closed up more than 1% while U.S. Treasury yields fell and the dollar was little changed on Wednesday as investors bet that upcoming U.S. inflation data would allow the Federal Reserve to slow the pace of interest rate hikes.

Longer-dated treasury yields fell a day before release of December’s U.S. consumer price index (CPI) data as investors bet inflation is on a sustainable downward path that could lead the Fed to slow rate hikes or cut rates.

While the dollar index was virtually unchanged, the euro briefly hit a seven-month high against the greenback but held within a narrow range as traders avoided big moves ahead of the inflation data.

Crude oil prices shrugged off early losses to rally 3% as hopes for an improved global economic outlook and concern over the impact of sanctions on Russian crude output outweighed a massive surprise build in U.S. crude stocks.

“This week is bundled up in some good inflation expectations data for Thursday,” said Nela Richardson, chief economist at ADP.

“The Goldilocks report we got for December with strong employment growth and moderating wage growth was the best case scenario for the market. They’re waiting for confirmation on Thursday that CPI is moderating. If they get that the rally will continue this week and on into next week.”

December’s CPI is expected to show annual inflation at 6.5%, down from 7.1% in November. The data will be crucial for investors placing bets on the Fed’s next steps.

But with a tight labor market that is “not participating in the Fed’s plan,” Richardson says investors seem to “over-prioritze data that suggests the Fed will pivot.”

“The market seems to think that a moderation in inflation necessarily leads to a Fed pivot but I don’t. I think the Fed keeps hiking rates and that they stay at higher levels for some time,” she said.

Current expectations are for a 25 basis points rate increase at the February meeting after a 50 basis point hike in December.

“The first step would be a downshift in the pace of hiking and the next would be a pause,” said Cliff Hodge, chief investment officer at Cornerstone Wealth.

The Dow Jones Industrial Average rose 268.91 points, or 0.8%, to 33,973.01, the S&P 500 gained 50.36 points, or 1.28%, to 3,969.61 and the Nasdaq Composite added 189.04 points, or 1.76%, to 10,931.67.

The pan-European STOXX 600 index earlier closed up 0.38% while MSCI’s gauge of stocks across the globe gained 1.04%. Emerging market stocks rose 0.28%.

In treasuries, benchmark 10-year notes were down 8.9 basis points to a 3.530% yield, from 3.619% late on Tuesday.

The 30-year bond was last down 10.5 basis points to yield 3.6491%, from 3.754%. The 2-year note was last was down 4.2 basis points to yield 4.2158%, from 4.258%.

Marvin Loh, senior global macro strategist at State Street said the Fed likely faces a battle in coming months as the market prices in rate cuts or policymakers agree to cut rates.

But he noted that the Fed keeps saying it may have to keep rates higher longer than the market expects.

In currencies, the dollar index fell 0.01%, with the euro up 0.19% to $1.0754.

The Japanese yen weakened 0.15% versus the greenback at 132.45 per dollar, while Sterling was last trading at $1.2147, down 0.07% on the day.

In oil futures, U.S. crude settled up 3.05% at $77.41 per barrel and Brent settled at $82.67, up 3.21% on the day. Both benchmarks had settled at their highest levels since Dec. 30, with WTI up for a fifth consecutive day for the first time since October and Brent up for a third day in a row for the first time since December. [O/R]

In precious metals, spot gold was flat at $1,876.43 an ounce after earlier scaling an eight-month peak of $1,886.59.

Earlier, copper rose above $9,000 a tonne for the first time since June on hopes for demand improvements in China, which has removed COVID-19 restrictions.

(Reporting by Sinéad Carew and Herbert Lash in New York, Huw Jones in London and Ankur Banerjee in Singapore; Editing by Bradley Perrett, Will Dunham, Himani Sarkar, Tomasz Janowski, David Goodman, William Maclean and David Gregorio)

Powell Highlights The Importance Of Fed’s Independence For Price Stability

Key Insights

  • Fed Chair Powell spoke at the symposium in Stockholm, Sweden. 
  • In his speech, Powell focused on the importance of central bank independence for price stability. 
  • Powell also noted that Fed would not set climate policy. 

Powell Defends Unpopular Decisions Needed To Fight Inflation

Today, Fed Chair Jerome Powell delivered a speech on central bank independence in Stockholm, Sweden.

Powell noted that stable inflation was the foundation of a healthy economy and added that the central bank was taking actions that were necessary but not popular.

He highlighted Fed’s indepedence and noted that it was extremely important to insulate monetary policy decisions from short-term political considerations.

Powell’s speech focused on the role of central bank independence in the U.S. economy and the world economy in general. Powell did not provide any additional insight on monetary policy.

Interestingly, Powell also commented on the topic of climate policy and noted that it was not Fed’s task to set climate rules.

S&P 500 Gains Ground After Powell’s Speech

S&P 500 moved higher after Fed Chair Jerome Powell speech. The speech did not contain new information for markets, and it looks that traders were relieved that he did not say anything too hawkish.

U.S. dollar pulled back from session highs, and the U.S. Dollar Index was mostly flat in today’s trading. While the Fed will continue to raise rates in order to fight inflation, traders expect that the central bank would not be too hawkish.

Interestingly, Treasury yields are moving higher in today’s trading session, but this move does not provide support to the American currency.

The yield-sensitive gold is trading near multi-month highs. Powell’s speech did not put any pressure on gold markets as it contained no surprises.

For a look at all of today’s economic events, check out our economic calendar.

Stock swoon resets valuations but recession risk, rates cloud outlook

By Lewis Krauskopf

NEW YORK (Reuters) – U.S. stocks are starting 2023 at much cheaper levels after Wall Street’s biggest swoon in 14 years but the potential for a recession combined with higher interest rates means equities may not be priced low enough to lure investors.

Since the S&P 500 reached an all-time high a year ago, the index’s price-to-earnings ratio has fallen over 20% from its peaks to levels closer to historic averages.

Some investors remain skeptical. Stocks may be more expensive than they appear if current earnings estimates do not fully account for any economic slowdown, while any downturn could further dampen what investors are willing to pay for equities.

Even so, a surprise drop in the U.S. jobless rate reported on Friday seems to have raised optimism about a soft economic landing.

“Valuations have corrected, but they are still not compelling relative to the macro challenges that exist,” said Keith Lerner, co-chief investment officer at Truist Advisory Services, which rates fixed income as more attractive than equities.

“At best, you can say that valuations are average,” Lerner said, “but the question I think you have to ask yourself is average enough given elevated recession risk?”

The S&P 500 tumbled 19.4% in 2022, as the Federal Reserve’s aggressive rate hikes designed to tamp down 40-year high inflation punished asset prices. As of midday Friday, the benchmark stock index was 0.8% firmer in the first week of 2023.

The market’s 2022 slide cut the ratio of price to forward earnings estimates to around 17 from about 21.7 a year ago, according to Refinitiv Datastream. The current level of 16.3 remains slightly above the index’s 15.8 average of the past 20

years.

Valuations may still be too high if a recession comes to pass, as many on Wall Street expect. Fund managers in last month’s BofA Global Research survey cited a deep global recession and persistently high inflation as the market’s biggest risks, with a net 68% forecasting a likely downturn in the next year.

UBS economists forecast a recession from the second through fourth quarters of this year, “as rate hikes push a vulnerable economy into contraction.”

“As growth deteriorates considerably into Q2/Q3, we assume the multiple falls toward 14.5 (times),” UBS equity strategists said in a note. Combined with an expectation of weakening earnings estimates, that would lower the S&P 500 to 3,200, UBS said, roughly 16% below current levels.

Any recession could pressure corporate profits more than is factored into projections. Consensus analyst estimates call for a 4.4% increase in earnings this year, according to Refinitiv IBES.

Yet during recessions, earnings fall at an average annual rate of 24%, according to Ned Davis Research. If estimates are overly rosy, that means the P/E ratio is higher than it appears, making stocks seem less attractive.

The profit picture will start to become clearer as fourth-quarter earnings season kicks off next week. Reports are due from banks Wells Fargo and Citigroup, healthcare titan UnitedHealth Group, asset manager BlackRock and Delta Air Lines.

The 2022 surge in interest rates also could undermine stock valuations by making relatively safe assets like U.S. Treasuries more attractive alternatives. Yields on benchmark Treasuries jumped to 15-year highs last year after a long period when relatively safe assets yielded little.

“The problem with the valuation analysis right now is the old saying was there is no alternative to stocks because interest rates were so low,” said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management.

With interest rates “significantly higher than they were the last decade … that higher multiple you used to pay for stocks may not be as justified,” he added.

The equity risk premium, or extra return investors expect to receive for holding stocks over risk-free government bonds, has become less favorable over the past year, according to Truist’s Lerner.

The current premium coincides with a 12-month excess return of 3.5% for the S&P 500 over the 10-year Treasury note, but “downgrades to the economy and earnings remain risks,” Lerner said in a note.

The S&P 500 rose 1.7% on Friday after the Labor Department said that the unemployment rate last month was a lower-than-expected 3.5%, and November’s was a downwardly revised 3.6%. Nonfarm payrolls rose 223,000, beating estimates and still showing a strong labor market, but less than November’s 256,000 jobs added.

A cooling of wage increases raised hopes that the Fed will continute to temper the aggressive rate hikes it delivered last year. The market now shifts attention toward Thursday’s December consumer price index report, which could also influence the Fed’s tightening path this year.

Investors are searching for bargains. State Street Global Advisors prefers mid-cap and small-cap stocks to their large-cap counterparts, said State Street’s chief investment strategist Michael Arone.

The S&P 400 midcap index and the S&P 600 small-cap index are both trading at around 13 times forward earnings estimates, well below their respective long-term averages, according to Refinitiv Datastream.

“As you move down in market capitalization, the valuations become more attractive,” Arone said.

(Reporting by Lewis Krauskopf and Alden Bentley; Editing by Richard Chang and David Gregorio)

ISM Non-Manufacturing PMI Missed Expectations, Boosting Hopes For A Less Hawkish Fed

Key Insights

  • ISM Non-Manufacturing PMI declined to 49.6 in December, indicating that the services segment of the economy found itself under pressure. 
  • Factory Orders decreased by 1.8% month-over-month in November. 
  • The U.S. dollar retreated after the release of the ISM and Factory Orders reports as traders bet on a less hawkish Fed.

ISM Non-Manufacturing PMI Fell Into Contraction Territory

On January 6, U.S. reported that ISM Non-Manufacturing PMI declined from 56.5 in November to 49.6 in December, compared to analyst consensus of 55. Numbers below 50 show contraction.

ISM Non-Manufacturing PMI fell into contraction territory for the first time since May 2020, when the economy was under serious pressure amid coronavirus crisis.

Traders also had a chance to take a look at the Factory Orders report for November. The report indicated that Factory Orders declined by 1.8% month-over-month, compared to analyst consensus of -0.8%.

Earlier, traders focused on the surprisingly strong job data, which indicated that Unemployment Rate declined to 3.5%. While the job market remains tight, the ISM report and Factory Orders data show that the economy is slowing down.

S&P 500 Rebounds After ISM Report

S&P 500 gained upside momentum after the release of the ISM and Factory Orders reports. The weak economic data is bullish for the stock market as it decreases chances for aggressive rate hikes from the Fed. While the Fed indicates that it is ready to push the interest rate above the 5.0% level and keep it there until 2024, markets do not believe that it is a viable plan. The weak reports boost hopes for a less hawkish Fed.

U.S. dollar found itself under significant pressure, and the U.S. Dollar Index moved towards the 104.50 level. The yield of 10-year Treasuries moved to new lows at 3.62%. A less hawkish Fed is bearish for the American currency and bullish for U.S. government bonds.

Gold benefited from weaker dollar and lower Treasury yields and moved towards the $1860 level. Other precious metals also gained upside momentum.

For a look at all of today’s economic events, check out our economic calendar.

US payrolls show labor market remains strong but wages rises cool

NEW YORK (Reuters) – The U.S. economy maintained a strong pace of job growth in December, with the unemployment rate falling to 3.5%, but higher borrowing costs as the Federal Reserve fights inflation could see the labor market momentum slowing significantly by mid-year.

Nonfarm payrolls increased 223,000 last month, the Labor Department said in its closely watched employment report on Friday. Data for November was revised lower to show 256,000 jobs added instead of 263,000 as previously reported.

Economists polled by Reuters had forecast payrolls increasing by 200,000 jobs. Monthly job growth is well above the pace needed to keep up with growth in the working age population.

MARKET REACTION:

STOCKS: S&P e-mini futures turned sharply higher, pointing to a strong opening on Wall Street, and were last up 1.0%

BONDS: The yield on 10-year Treasury note fell and was last down 1.5 basis points from the close at 3.707%; The two-year U.S. Treasury yield was down 3.5 basis points from Thursday at 4.419%.

FOREX: The euro turned 0.1% firmer against the dollar, while the dollar index reversed slightly lower

COMMENTS:

RICHARD FLAX, CHIEF INVESTMENT OFFICER, MONEYFARM, LONDON

    “The slowing in average hourly earnings would be taken positively.”

    “A lower unemployment rate in the sense that it would suggest that future wage growth to be decelerating, that would be taken be taken positively by policymakers.”

    “Fed will look at these numbers and say that the labor market is still pretty robust and to the extent that they would like to see a bit of slack in the labor market.”   

    “Maybe if you wanted to be very optimistic, you would say that a slowdown in the growth of average hourly earnings is a positive thing, but it’s a single data point.”

PAUL NOLTE, PORTFOLIO MANAGER, KINGSVIEW ASSET MANAGEMENT, CHICAGO

“Gains in new jobs are heading in the right direction as far as Wall Street is concerned.”

“It’s possible that we see maybe a little bit of bargain hunting, especially in some of the tech names that have gotten pretty beat in the last couple of weeks.”

“When you look at any normal month, 220,000 new jobs is still a pretty hefty number. The Fed will still be on the path of hiking rates, but it will be at a lower pay or slower pace. It will not be at 75 basis points, it’s likely to be 25 basis points, but they will still be raising rates. This is not an indication of an economy that is going into recession, at least through the lens of the jobs numbers.”

(Compliled by the global Finance & Markets Breaking News team)

Services PMI Exceeds Estimates But Remains In Contraction Territory

Key Insights

  • Services PMI dropped from 46.2 in November to 44.7 in December, exceeding analyst estimates.
  • Services PMI remains in contraction territory for the sixth month in a row. 
  • Traders will likely stay focused on today’s job market data. 

The Services Industry Remains Under Pressure

On January 5, U.S. reported that Services PMI declined from 46.2 in November to 44.7 in December. Analysts forecasted that Services PMI would drop to 44.4, so the report exceeded expectations. Numbers below 50 show contraction.

The Services PMI is falling for a third month in a row. The services industry remains under pressure since July 2022, when Services PMI fell below the 50 level.

Interestingly, job markets remain in a decent shape despite problems in the services segment. Today, ADP Employment Change report showed that private businesses added 235,000 jobs in December. Initial Jobless Claims declined from 223,000 to 204,000.

The Fed believes that the job market is too tight, so it is focused on jobs data. In this situation, the weak PMI data should not have a material impact on Fed’s thinking in the near term. Most likely, the Fed will stay hawkish, which is bearish for riskier assets.

U.S. Dollar Index Tests New Highs After PMI Data

S&P 500 has started to rebound from session lows after the release of the PMI data. Today’s job market reports put significant pressure on stocks as the strong job market leads to a more hawkish Fed.

Treasury yields are moving higher, which is bearish for precious metals. Gold declined towards the $1835 level, while silver settled near $23.30.

The U.S. Dollar Index moved to session highs after the release of the PMI report. Currently, the U.S. Dollar Index is trying to settle above the 105 level.

For a look at all of today’s economic events, check out our economic calendar.

Stocks, bonds jump as investors shrug off hawkish Fed minutes

By Koh Gui Qing

NEW YORK (Reuters) -Global stocks and bonds closed higher on Wednesday on cautious optimism about the new year after a brutal 2022, although U.S. stocks eased off session highs after the Federal Reserve released minutes from its December meeting that struck a hawkish note.

The MSCI All-World index added 0.65%, receding from earlier highs and in tandem with U.S. stocks, which pulled back after the Fed’s minutes showed it was worried about any market “misperception” that its commitment to fighting inflation was flagging.

Describing the minutes as “modestly hawkish”, analysts at Citi said they expect the Fed to raise rates by 50 basis points in February, and for U.S. rates to peak between 5.25% and 5.5%. U.S. rates stand at 4.25% to 4.5% currently.

“Fed officials are clearly growing more uncomfortable with the market underpricing their likely policy path and may use more hawkish rhetoric to drive front-end rates higher and financial conditions tighter,” the analysts at Citi said.

U.S. stocks still ended up on the day. The S&P 500 climbed 0.75%, the Dow Jones Industrial Average rose 0.4%, and the Nasdaq Composite climbed 0.7%.

Data released on Wednesday showed U.S. job openings falling less than expected on the last day of November, indicating a still-tight labour market that could allow Fed to keep rates higher for longer.

The pan-European STOXX 600 jumped 1.4% as a lower inflation reading from France boosted sentiment, building on positive data from Germany earlier in the week.

Euro zone government bonds extended their rally from the first two trading days of 2023, with the benchmark German 10 year yield sliding around 10 basis points on signs central banks are making progress against inflation.

The yield on 10-year U.S. Treasury notes fell to 3.679%, and 2-year Treasury yields, which typically move in step with interest rate expectations, slipped to 4.3534%.

MSCI’s broadest index of Asia-Pacific shares outside Japan jumped 1.8% in its third straight day of gains for the year. In 2022 it fell 20%, its biggest annual decline since 2008.

The modest recovery in stocks and bonds showed optimism about two factors that made 2022 a hellish year for investors: the constant drumbeat of rate hikes to fight inflation and China’s economy-throttling anti-COVID measures.

But investors in other assets were jittery. Oil prices fell sharply, as concerns about global demand persisted amid signs of weakening activity in the main engines of global growth: the United States, Europe and China.

“Fresh warnings about the effect of aggressive rate hikes on the U.S. economy are rattling traders again, with the oil price continuing its march downwards,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

U.S. crude fell 4.85% to $73.2 per barrel, while Brent was at $78.07, down 4.9% on the day. [O/R]

TENTATIVE START

“The market has made a pretty tentative start to the year … (and) is still grappling with the notion of what we are going to see from the Fed this year,” said Rob Carnell, head of ING’s Asia-Pacific research.

“There are two camps out there and they are wrestling for dominance in terms of the view. Some days higher-for-longer wins, some days (the) higher-then-lower camp wins,” Carnell said.

Hopes for less aggressive rate hikes boosted non-yielding gold, with spot prices for the precious metal hitting $1,856.57 per ounce, their highest since mid-June. [GOL/]

The dollar index, which measures the greenback against six other currencies, fell 0.45% as commodities currencies like the Australian dollar gained and the euro rose on the positive French and German inflation data. [USD/]

Sterling was last trading at $1.20575, up 0.75%, while the euro rose 0.54% to $1.06050, coming off a three-week low of $1.0519 touched overnight.

The Japanese yen softened against the dollar at 132.500 per dollar.

(Reporting by Lawrence White and Ankur Banerjee; Editing by Chizu Nomiyama, Mark Potter and Angus MacSwan)

ISM Manufacturing PMI Report Highlights Contraction In Factory Activity

Key Insights

  • ISM Manufacturing PMI declined from 49 in November to 48.4 in December. 
  • The report highlighted the current weakness in factory activity. 
  • Riskier assets pulled back after the report as traders focused on recession risks. 

ISM Manufacturing PMI Missed Analyst Expectations

On January 4, U.S. reported that ISM Manufacturing PMI declined from 49 in November to 48.4 in December, compared to analyst consensus of 48.5. ISM Manufacturing New Orders declined from 47.2 to 45.2. Numbers below 50 show contraction.

The Institute for Supply Management commented: “The U.S. manufacturing sector again contracted, with the Manufacturing PMI at its lowest level since the coronavirus pandemic recovery began. With Business Survey Committee panelists reporting softening new order rates over the previous seven months, the December composite index reading reflects companies’ slowing their output.”

The report confirmed the slowdown of the economy. Traders are trying to predict whether economic weakness will force the Fed to be less hawkish. At this point, it looks that the Fed will not change its mind in the near term.

S&P 500 Declines After PMI Data

S&P 500 gained downside momentum and moved to session lows after the release of the ISM reports. Traders do not believe that the Fed would be less hawkish at the next meeting and focus on recession risks.

The report has also provided support to the U.S. dollar, which benefited from its status of a safe-haven asset. The U.S. Dollar Index moved from 104 to 104.35.

Treasury yields have moved higher, and the yield of 10-year Treasuries settled back above the 3.70% level.

Meanwhile, gold pulled back towards the $1850 level as traders focused on stronger dollar. It remains to be seen whether the current pullback will be strong as gold gets support from rising demand for safe-haven assets.

For a look at all of today’s economic events, check out our economic calendar.

Wall Street surges in dip-buying rally, oil falls

By Stephen Culp

NEW YORK (Reuters) – U.S. stocks closed sharply higher on Thursday, powered by a rebound in recently battered mega-cap growth stocks, while crude oil prices declined as a surge of COVID cases in China exacerbated fears of global economic downturn.

All three major U.S. stock indexes jumped in a broad-based rally on the penultimate trading day of the year, with the tech-heavy Nasdaq out front. European shares also advanced, but gains were held in check by worries over spiking COVID cases in China, the world’s second largest economy.

The S&P 500, up 1.7% and the Nasdaq, up 2.6%, notched their biggest one-day percentage gains in a month, boosted as rising U.S. jobless claims suggested the Federal Reserve’s interest rate hikes have been having their intended effect.

“It’s nice to see green on the screen,” said Terry Sandven, Chief Equity Strategist at U.S. Bank Wealth Management in Minneapolis. “Stocks are trending higher as investors look to put a wrap on 2022, while approaching 2023 with a renewed sense of optimism.”

Spiking cases of COVID-19 in China, in the wake of Beijing easing its pandemic-curbing restrictions, curbed risk appetite elsewhere, pressuring the dollar and weighing on crude prices.

With central banks hiking interest rates to fight inflation and the war in Ukraine roiling global markets, worries about global recession preoccupied investors this year. Wall Street’s three major stock indexes notching their steepest annual percentage losses since 2008, the nadir of the global financial crisis.

“While macro headwinds remain, there is reason for optimism,” Sandven added. “Valuations have been reset lower, implying an improved risk-reward profile, particularly among growth oriented sectors.”

A sharp decline in euro zone business lending offered further evidence that rate hikes by the Fed and the European Central Bank are succeeding in curtailing demand to cool inflation.

“Performance in 2022 was largely impacted by the duration and magnitude of inflation,” Sandven said. “2023 will be all about the magnitude and duration of recession.”

The Dow Jones Industrial Average rose 345.09 points, or 1.05%, to 33,220.8, the S&P 500 gained 66.06 points, or 1.75%, to 3,849.28 and the Nasdaq Composite added 264.80 points, or 2.59%, to 10,478.09.

The pan-European STOXX 600 index rose 0.68% and MSCI’s gauge of stocks across the globe gained 1.26%.

Emerging market stocks lost 0.28%. MSCI’s broadest index of Asia-Pacific shares outside Japan closed 0.52% lower, while Japan’s Nikkei lost 0.94%.

U.S. jobless claims data boosted prices in the bond market, and benchmark Treasury yields softened after three days of gains. Ten-year notes rose 15/32 in price to yield 3.8296%, from 3.886% late on Wednesday.

The 30-year bond rose 36/32 in price to yield 3.9142%, from 3.977% late on Wednesday.

The dollar lost ground against a basket of world currencies after jobless claims data suggested some easing in the tight labor market, even as optimism over Beijing’s relaxed COVID restrictions reopening was dampened by a wave of new COVID cases there.

The dollar index fell 0.54%, with the euro up 0.53% to $1.0664.

The Japanese yen strengthened 1.12% versus the U.S. currency at 133.00 per dollar, while sterling was last trading at $1.2065, up 0.43% on the day.

Crude oil prices slid due to uncertainties surrounding the wave of COVID infections in China, but its losses were held in check by strong U.S. demand.

U.S. crude shed 0.7% to settle at $78.40 per barrel, while Brent settled at $82.26 per barrel, down 1.2% on the day.

Gold advanced, bolstered by the dollar’s weakness.

Spot gold added 0.6% to $1,814.94 an ounce.

(Reporting by Stephen Culp, additional reporting by Elizabeth Howcroft in London; Editing by Emelia Sithole-Matarise, Chizu Nomiyama and David Gregorio)

Equities fall on risk aversion with 2023, China reopening in focus

By Sinéad Carew

NEW YORK (Reuters) – Equity indexes closed lower on Wednesday while U.S. Treasury yields rose as investors eyed 2023 with caution and weighed hopes for an economic boost from China’s relaxed COVID-19 restrictions against concerns about rising infections there.

The yield on benchmark U.S. 10-year Treasuries rose for a third straight day, reversing an earlier decline as investors watched China’s reopening and also placed bets on the Federal Reserve’s future interest rate hiking path.

In currencies, the dollar hit a one-week high against the yen with a boost from rising Treasury yields and sterling lost ground against the greenback after rallying earlier in the day.

The Nasdaq closed down 1.35%, hitting a new bear-market closing low for the technology-heavy index, as investors shied away from growth stocks and riskier bets. Wednesday’s loss marked a drop of more than 36% from Nasdaq’s November record closing high.

MSCI’s broadest index of global stocks was down 0.92% in the third-last trading day of a brutal year for equities. The global index is on course to end 2022 down more than 20%, for its biggest annual decline since 2008 during the financial crisis.

Investors were still digesting China’s announcement on Monday of the end to quarantine requirements for inbound travellers on Jan. 8. China’s health system has come under heavy stress since Beijing lifted domestic restrictions. But strategists at JP Morgan forecast a “likely infection peak” during the Lunar New Year holiday next month.

Thomas Hayes, chairman of Great Hill Capital LLC in New York, said reopening of the world’s second-largest economy should ultimately benefit the U.S. economy.

“The speed at which they have reversed their stance has caught people off guard,” he said. “People are skeptical because the last two years have been such a debacle in China.”

But Amit Sinha, head of multi-asset strategy at Voya Investment Management, said Wednesday’s stock declines stemmed from “noise” such as low liquidity and tax loss harvesting where investors sell money-losing investments.

“Today there’s nibbling away at risk and selling for tax loss harvesting purposes,” said Sinha. “Markets have been going down for the course of December. There’s a negative sentiment and momentum already.”

Sinha sees “reasons why people want to sell” with 2023 presenting uncertainties around the Fed’s rate hiking path in terms of whether it can control inflation without damaging the economy.

“There’s no compelling reason to be on the other side. It exaggerates the price decline,” he said.

The Dow Jones Industrial Average fell 365.85 points, or 1.1%, to 32,875.71, the S&P 500 lost 46.03 points, or 1.20%, to 3,783.22 and the Nasdaq Composite dropped 139.94 points, or 1.35%, to 10,213.29, its lowest closing level since July 2020, in the thick of the COVID-19 pandemic.

In Treasuries, benchmark 10-year notes were up 3 basis points at 3.888%, from 3.858% late on Tuesday. The 30-year bond was last up 3.2 basis points to yield 3.9746%, from 3.943%. The 2-year note was last was down 0.9 basis point to yield 4.3594%, from 4.368%.

“If the 10-year gets to 4%, the flood gates are going to open, there will be a lot of buying at that level,” said Jay Sommariva, managing partner and chief of asset management at Fort Pitt Capital Group in Pittsburgh.

In foreign exchange markets, the dollar index rose 0.307%, with the euro down 0.28% to $1.0608.

The Japanese yen weakened 0.72% versus the greenback at 134.45 per dollar, while Sterling was last trading at $1.2018, down 0.02% on the day.

Oil prices closed lower but had regained some lost ground by settlement as traders weighed COVID news from China.

U.S. crude settled down 0.07% at $78.96 per barrel while Brent finished at $83.26, down 1.27% on the day.

Gold prices dropped about 1% earlier in the session as higher Treasury yields weighed and after the precious metal reached a six-month peak on Tuesday.

Spot gold dropped 0.5% to $1,804.33 an ounce. U.S. gold futures fell 0.55% to $1,808.80 an ounce.

(Reporting by Sinéad Carew, Chuck Mikolajczak, Ankur Banerjee, Naomi Rovnick; Additional reporting by Ankika Biswas; Editing by Josie Kao and Matthew Lewis)