- Wall Street stocks were mixed after Wednesday’s gains
- Europe is ticking despite stubborn inflation numbers
- Treasury yields hit 16-week high, dollar gains
- US jobless claims fall again
March 2 (Reuters) – Equity markets were mixed on Thursday, weighed down by rising bond market costs as stubbornly high European inflation and US jobless claims data fueled expectations of more global interest rate hikes.
European stocks edged higher after falling to a one-month low (.STOXX) as euro-zone inflation figures justified what was widely expected to mean European Central Bank interest rates this month rising another 50 basis points from a decade be at a high level.
Consumer price inflation in the 20 countries that share the euro currency fell to 8.5% in February from 8.6% a month earlier on lower energy prices, a barely noticeable move and above the 8.2% reported by Reuters the economists surveyed had expected.
It wasn’t enough to lift the euro or stem the dollar’s rise, however, as Wall Street stocks lacked clear direction as US jobless claims fell again and a measure of the price of labor last week quarter was up 3.2% on an annualized basis.
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The inflation numbers “just mean that the entire market will raise its forecasts for peak interest rates in Europe and the US,” said Societe Generale strategist Kit Juckes. “It turns out to be stickier than expected almost everywhere.”
The Dow Jones Industrial Average (.DJI) rose 0.3%, while the S&P 500 (.SPX) lost 0.25%.
The Nasdaq Composite (.IXIC) is down 0.5%, Tesla Inc. (TSLA.O) is down about 5%. The company said it will halve vehicle assembly costs in future generations of vehicles, but Chief Executive Elon Musk didn’t unveil a long-awaited small, affordable electric vehicle.
MSCI’s broadest index of world stocks (.MIWD00000PUS) fell 0.3% to a seven-week low.
Investor enthusiasm has faded over China’s economic reopening after Beijing eased its tight COVID-19 controls in December, as analysts look for more evidence to gauge the pace of the economic recovery.
Equity and bond markets have been driven by a variety of factors over the past few weeks, said Kevin Gardiner, global investment strategist at Rothschild & Co. The main concern for equities is the expectation of corporate earnings being squeezed, while bonds are sensitive to inflation and interest rate expectations.
“Over the past few months, stock markets have come to terms with the fact that despite all these predictions of an impending earnings slump, a severe economic downturn has not materialized,” he said.
Falling natural gas prices and the removal of supply chain bottlenecks following Russia’s invasion of Ukraine are an overlooked development in capital markets, he said.
“The economic impact of the streamlining remains a mystery. Profitability may not be that fragile, at least not yet,” he said.
Overnight both benchmark government bonds and equities took a hit as inflation indicators out of Germany and the United States fueled expectations that interest rates would rise and stay there longer
Yields on two-year German government bonds rose to their highest level since October 2008.
In the United States, manufacturing activity contracted for the fourth straight month in February, but commodity prices rose last month, raising concerns that inflation would remain stubborn.
“Economic data has surprised on the upside,” said Steven Oh, global head of credit and fixed income at PineBridge Investments. Any unexpected outcome in the data would cause policymakers to become more aggressive and that would reset market expectations, he said.
“Now the question becomes, have we reset expectations sufficiently and how do we proceed from here?” he said.
PRESSURE POINTS
Benchmark 10-year government bond yields hit a new four-month high of 4.071%, while two-year yields also rose to 4.918%, a new 16-year high.
Investors are still largely expecting the Fed to hike rates by 25 basis points at its next meeting later this month, but expectations of a larger 50 basis point hike have risen. The probability that the Fed’s policy rate, currently between 4.5% and 4.75%, could peak above 5.5% was 53%, compared to 41.5%, according to the CME Fedwatch tool on February 28th.
“We expect interest rates to remain elevated for longer and we anticipate stock market volatility ahead,” strategists at the Wells Fargo Investment Institute wrote on Thursday.
They added that the economy is slowing, but stronger-than-expected economic data this winter pushed their recession outlook into the second half of 2023.
DOLLAR RECOVERY CONTINUES
In the currency markets, the US Dollar Index, which measures its value against a basket of major peers, gained 0.45% to 104.952. The index is now up about 1.4% for the year but still below its September high of about $114.
The euro lost about 0.6% and the pound fell 0.75%, with hotter-than-expected inflation numbers putting pressure on the ECB to hike interest rates.
In the crypto world, shares of Silvergate Capital (SI.N) plunged 44% after the cryptocurrency-focused bank announced it was delaying its annual report and evaluating its ability to continue as a going concern. Bitcoin was last down about 1% to $23,322.
Oil prices detracted from early gains as signs of a strong economic recovery in main crude oil importer China were offset by fears over the impact of potential interest rate hikes in Europe. US crude was up 0.49% to $78.07 a barrel and Brent was at $84.53, up 0.26% on the day
Spot gold was slightly lower at $1,835 an ounce.
Reporting by Lawrence Delevingne in Boston and Nell Mackenzie and Marc Jones in London; Edited by Tomasz Janowski, Sharon Singleton, Emelia Sithole-Matarise and Andrea Ricci
Our standards: The Thomson Reuters Trust Principles.
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