*
Stocks rebound, bond yields retreat
*
Dollar pulls back after biggest weekly rally since
September
*
Higher peak seen for Fed rates
*
Positive U.S. manufacturing, home sales data
By Lawrence Delevingne and Amanda Cooper Feb 27 (Reuters) - Wall Street and global shares rebounded on Monday on positive 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 U.S. previously owned homes rose by 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 rose on Monday, a sign of potential bargain hunting. The
Dow Jones Industrial Average rose 0.4%, to 32,948.76, the
S&P 500 gained 0.5%, to 3,990.25 and the Nasdaq Composite added 0.84%, to 11,491.06. The MSCI All-World index of global shares was up about 0.6%, 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 2.6% decline in February, after a
rally in January saw many major stock indices post their
strongest performance for the first month of the year 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, which was founded on expectations that
the 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 by more and
stay at those levels for 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 as
it was 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 and
business-sector activity data, markets showed traders expected a
peak rate of 4.73%, meaning that there's almost an extra
three-quarters of a point now priced in.
U.S. two-year Treasury yields , the most sensitive
to shifts in interest-rate expectations, have risen by almost 80
bps in that time, while the S&P 500 has lost 6% in value
from Feb. 2's five-month highs.
In Monday action, the two-year U.S. Treasury yield fell 1.8
basis points to 4.787%, while 10-year Treasury yields dropped 3.1 basis points to 3.918%.
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 currently price in. It is not just the United States where investors believe the central bank will have to keep raising rates to bring inflation back down. 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 3% this month against a basket of major currencies , which would mark its strongest monthly performance since September, when it hit 20-year highs.
The dollar was last down 0.5% on the day, pushed in part by gains in the pound , which was last up 1% as British Prime Minister Rishi Sunak struck a new deal with the European Union on post-Brexit trade rules for Northern Ireland. Oil prices edged lower 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 0.71% to $75.78 per barrel and Brent was at $82.54, down 0.75% on the day. Spot gold added 0.4% to $1,817.54 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 and Angus MacSwan)
