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Stocks edge up, bond yields retreat
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Dollar pulls back after biggest weekly rally since
September
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Higher peak seen for Fed rates
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Positive U.S. manufacturing, home sales data
By Lawrence Delevingne and Amanda Cooper
Feb 27 (Reuters) - Wall Street and global shares
rebounded modestly on Monday on favorable economic data and
bargain hunting, but remained within sight of recent six-week
lows, as investors prepared for higher interest rates in the
United States and Europe.
U.S. core capital goods orders accelerated in January,
beating forecasts, according to government figures released on
Monday, and contracts to buy previously owned U.S. homes rose
the most in more than 2-1/2 years in January.
At the same time, Federal Reserve Governor Philip Jefferson
said on Monday he was under "no illusion" that inflation would
return quickly to the Fed's target, with the cost of a broad
array of services in the United States still "stubbornly high."
Amid a confounding mix of economic signals, Wall Street
shares edged up on Monday, a sign of potential bargain hunting.
The Dow Jones Industrial Average rose 0.2% to 32,889.09,
the S&P 500 gained 0.3%, at 3,982.24, and the Nasdaq
Composite added 0.6%, at 11,466.98.
The MSCI All-World index of global shares was up 0.44% after dropping 2.6% last week, its largest weekly
decline since late September thanks to a sizzling rally in the
dollar.
The index is heading for a nearly 3% decline in February,
after a rally the month before drove many major stock indices to
their strongest January performance in years.
"With the equity market showing signs of exhaustion after
the last Fed meeting, the S&P 500 is at critical technical
support," Morgan Stanley U.S. equity analysts wrote in a note on
Monday. "Given our view on earnings, March is a high risk month
for the bear market to resume."
January's euphoria, founded on expectations that major
economies will avoid tumbling into recession this year, has
given way to something approaching realism about the outlook for
interest rates, which are going to rise more and stay high
longer than many had previously anticipated.
"Fed speak this week ... will emphasize the need for more
rate hikes, as per usual by now," TD Securities strategists
wrote in a note on Monday. If economic data for February is as
strong in January, "some officials might signal upside risk to
their rate outlook," they added.
Fed futures now have rates peaking at around
5.4%, implying at least three more hikes from the current 4.50%
to 4.75% band, and some chance of 50 basis points in March.
When the Fed concluded its last policy meeting in early
February, prior to the release of bumper January employment,
consumer spending, and business-sector activity data, markets
showed traders expected a peak rate of 4.73%, meaning that
almost an extra three-quarters of a point is now priced in.
U.S. two-year Treasury yields , the most sensitive
to shifts in interest-rate expectations, have risen almost 80
bps in that time, while the S&P 500 has lost 6% from Feb.
2's five-month highs.
On Monday, the two-year U.S. Treasury yield fell 2 basis
points to 4.785%, while 10-year Treasury yields dropped 2.3 basis points to 3.926%.
STOCKS RECOUP SOME LOSSES
European stocks bounced back on Monday, as typically
rate-sensitive sectors such as oil and gas and technology picked
up after falling sharply last week by 1.4% and 3.8%
respectively.
The STOXX 600 , which last week lost 1.4%, was up
about 1.1%.
Economists at British banks Barclays and Natwest both said
they believe the Fed could raise rates by as much as half a
percentage point in March, well above the quarter-point that
markets have priced in.
It is not just the United States where investors believe the
central bank will have to keep raising rates to reduce
inflation. Money markets show traders believe the European
Central Bank and the Bank of England will have to lift rates to
a higher peak and leave them there for longer. Bruce Kasman, head of economic research at JPMorgan, has
added another quarter-point hike to the ECB outlook, taking it
to 100 basis points. Germany's 2-year bond yield broke above 3.0% on Friday for the first time since 2008.
"The risk is clearly skewed toward greater action from the
Fed," Kasman said.
The dollar has been the main beneficiary of the shift in
expectations for Fed rates.
It has risen by around 2.5% this month against a basket of
major currencies , which would mark its strongest monthly
performance since September, when it hit 20-year highs.
It was last down 0.5% on the day, pushed in part by gains in the pound , which gained about 1% as British Prime Minister Rishi Sunak struck a deal with the European Union on post-Brexit trade rules for Northern Ireland. Oil prices declined on Monday as the dollar's recent strength discouraged buying, though losses were limited by supply concerns after Russia halted exports to Poland via a key pipeline. U.S. crude fell 0.85% to $75.67 per barrel and Brent was at $82.25, down 1.09% on the day. Spot gold added 0.4% to $1,817.40 an ounce. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ MSCI All Country World index Global currencies vs. dollar ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Lawrence Delevingne in Boston and Amanda Cooper in London. Additional reporting by Wayne Cole in Sydney; Editing by Susan Fenton, Christina Fincher, Angus MacSwan and Richard Chang)
