By Sinéad Carew and Marc Jones
NEW YORK/LONDON (Reuters) – MSCI’s global index of stocks was on track for its biggest one-day percentage decline so far in 2023, while Treasury yields rose as a surge in U.S. private payrolls fueled worries that interest rates would stay higher for longer.
Payroll company ADP said June private payrolls rose 497,000, far exceeding economists’ expectations for a 228,000 increase and 267,000 in May. The Labor Department said initial claims for state unemployment benefits rose 12,000 to a seasonally adjusted 248,000 for the week ended July 1, but the prior week was revised to show 3,000 fewer applications than previously reported.
Compounding worries that this would lead to a more hawkish central bank, Federal Reserve Bank of Dallas President Lorie Logan said on Thursday that a continued above-target inflation outlook and a stronger-than-expected labor market “calls for more-restrictive monetary policy.”
U.S. Treasury yields climbed after the labor market data boosted expectations for aggressive Fed rate hikes to rein in stubbornly high inflation. The U.S. dollar had pared losses against other major currencies after the report while stock indexes were in the red across the board.
“All of it paints a picture of a market that’s concerned about the economy and a Fed that is still dead set on tightening monetary policy,” said Alex Coffey, senior trading strategist at TD Ameritrade.
With “no signs of deterioration in the labor market,” Coffey said he expected “potentially more hawkish decision-making from the Fed” and that increasingly tight monetary policy will “all but assuredly cause some sort of economic slowdown.”
Money market traders now see an 94.9% chance of a quarter-point hike at the bank’s next meeting on July 26 and was betting on a 28.5% chance of another hike in September compared with 19.1% on Wednesday, according to CME Group’s FedWatch tool.
The Dow Jones Industrial Average fell 498.76 points, or 1.45%, to 33,789.88; the S&P 500 lost 61.11 points, or 1.37%, at 4,385.71; and the Nasdaq Composite dropped 217.97 points, or 1.58%, to 13,573.69.
The pan-European STOXX 600 index lost 2.48% and MSCI’s gauge of stocks across the globe shed 1.69% and was on track for its biggest one-day percentage decline since mid-December.
Emerging market stocks lost 1.88%. MSCI’s broadest index of Asia-Pacific shares outside Japan closed 1.94% lower, while Japan’s Nikkei fell 1.70%.
In Treasuries 2-year Treasury yields rose above 5% for the first time since early March and touched their highest levels since June 2007. [GVD/EUR][US/]
Benchmark 10-year notes were up 11.8 basis points at 4.063%, from 3.945% late on Wednesday. The 30-year bond rose 6.3 basis points to yield 4.0073%, from 3.944%. The 2-year note was last was up 10.5 basis points to yield 5.0564%, from 4.951%.
In currencies, the dollar index fell 0.048%, with the euro up 0.13% at $1.0865. The Japanese yen strengthened 0.35% versus the greenback at 144.14 per dollar, while Sterling was last trading at $1.2694, down 0.08% on the day.
CHIPPING AWAY
The latest flare-up of tensions among the United States, Europe and China also dampened the market mood.
U.S. Treasury Secretary Janet Yellen kicked off a four-day visit to China on Thursday, just days after Beijing slapped export curbs on some key metals used in microchips and signaled the move may be “just a start.”
“Sentiment has soured for equity bulls as Sino-U.S. relations take another step backwards and investors adjusted to the fact that the Fed remains more hawkish than hoped,” said Matt Simpson, a market analyst at City Index.
While almost every Fed official agreed to hold interest rates steady last month, minutes of their meeting showed the vast majority expected further increases eventually.
In energy markets, oil prices fell as the market digested the higher likelihood of a U.S. rate hike, accelerating fears of global economic slowdown against tighter crude supply.
U.S. crude fell 1.03% to $71.05 per barrel and Brent was at $75.81, down 1.1% on the day.
In precious metals, spot gold dropped 0.4% to $1,909.99 an ounce. U.S. gold futures fell 0.82% to $1,903.90 an ounce.
(Reporting by Sinéad Carew in New York, Marc Jones in London; Editing by Clarence Fernandez, Hugh Lawson and Richard Chang)
