By Herbert Lash and Nell Mackenzie
NEW YORK/LONDON (Reuters) -Global equities slid and Treasury yields fell on Friday after Federal Reserve Chair Jerome Powell dashed expectations that U.S. interest rates have peaked, but stocks rose on Wall Street as eyes turned to next week’s inflation data.
Powell told an International Monetary Fund conference on Thursday the Fed would “not hesitate” to tighten monetary policy if needed and that the fight to restore price stability “had a long way to go.”
Powell’s remarks, along with a weak auction of $24 billion in 30-year Treasuries, pushed yields higher, cast a shadow on equities and helped lift the dollar on Thursday.
Many investors embraced the notion that U.S. rates have peaked after the Fed kept its overnight lending rate steady last week, a move that bolstered speculation the tightening cycle was over and spurred a short-lived rally in risky assets.
The market is waiting for next week’s consumer price index (CPI) and to a lesser extent retail sales for signs of decelerating inflation and slower consumer spending.
“We have the possibility of seeing a downside surprise” in CPI “mainly because for the headline (number) certainly gasoline prices have fallen a lot,” said Thierry Wizman, global FX and interest rates strategist at Macquarie in New York.
“We could also see some downside surprises in the core components of rents, for example, air fares, new cars, etc.”
Core CPI month-over-month is expected to have risen 0.3% in October, with a year-over-year increase of 4.1%, a Reuters poll showed. Both estimated gains are the same as in September.
“If we were to get a low CPI next week, yields can come down around that number and we may get some weakening in the dollar,” Wizman said.
MSCI’s gauge of global equity performance shed 0.02%, on track for a fourth session of losses, and the broad pan-European STOXX 600 index lost 1.04%.
But stocks on Wall Street rose. The Dow Jones Industrial Average rose 0.39%, the S&P 500 gained 0.62% and the Nasdaq Composite added 1%.
The two-year Treasury yield, which reflects interest rate expectations, fell 0.2 basis points to 5.020%, while the benchmark 10-year yield was down 3.2 basis points at 4.598%.
Some investors said Powell’s hawkish comments on Thursday might have been prompted by a recent softening of financial conditions after yields tumbled in recent weeks.
“The recent decline in U.S. yields has sparked questions about the necessity for the Fed to increase rates further, especially if market yields continue to adjust downward,” Bruno Schneller, managing director at INVICO Asset Management.
U.S. rate futures have priced in a roughly 60% chance of a rate cut at the Fed’s June 2024 meeting, according to the CME’s FedWatch tool, down from about 70% before Powell’s speech.
Traders would be keeping a close watch on interest rate volatility, said Schneller, noting major market fluctuations recently. “A primary cause for this volatility is the debate over whether the current Fed funds rate is overly high or insufficient.”
Asian stocks closed the day down as worries over China, the world’s second-biggest economy, resurfaced after data on Thursday showed Chinese consumer prices dipped again.
Tapas Strickland, head of market economics at NAB, said the data keeps the pressure on Beijing to continue with its incremental easing in monetary and fiscal policy.
In currency markets, the dollar index rose 0.019% to 105.91, with the euro up 0.04% to $1.067.
The Japanese yen weakened as traders remained on watch for possible intervention to shore up the struggling currency. The yen weakened 0.11% at 151.48 per dollar.
The dollar touched one-week highs against the Australian and New Zealand dollars. [FRX/]
Oil prices rose but were set to fall for a third week on signs of slowing demand and as market attention turns to a key meeting of OPEC and its allies this month, which will determine the cartel’s next move on production.
U.S. crude recently rose 1.7% to $77.03 per barrel and Brent was at $81.27, up 1.57% on the day.
Gold hit an over three-week low on Friday, headed for a second straight weekly decline.
Spot gold dropped 1.0% to $1,938.89 an ounce.
(Reporting by Nell Mackenzie in London; Editing by Dhara Ranasignhe, Tomasz Janowski and Richard Chang)
