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Global stocks mostly reverse Wednesday's gains
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Europe dips on sticky inflation numbers
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Treasury yields hit 16-week high, dollar gains
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U.S. jobless claims fall again
By Lawrence Delevingne and Marc Jones March 2 (Reuters) - Stock markets sputtered on Thursday, pressured by a pullback in Chinese shares and rising bond market costs as stubbornly high European inflation and U.S. jobless claims data fuelled expectations of more global interest rate rises. European shares had already sagged to a one-month low by the time euro zone inflation numbers justified what is widely expected to be another 50 basis point hike in the European Central Bank's already-decade high rates this month. Consumer price inflation in the 20 countries sharing the euro currency eased to 8.5% in February from 8.6% a month earlier on lower energy prices, a barely noticeable move and above the 8.2% economists polled by Reuters had expected. It wasn't enough to lift the euro or stall the dollar's rise though while European shares had trimmed falls, Wall Street stocks were flat or down as U.S. jobless claims numbers also fell again.
The inflation numbers "just mean that the whole market is going to lift its guess for peak rates in Europe and the U.S." said Societe Generale strategist Kit Juckes. "It is proving stickier-than-expected just about everywhere."
The Dow Jones Industrial Average rose just 0.18%, to 32,719.3 while the S&P 500 lost 0.47%, to 3,933.01.
The Nasdaq Composite dropped 0.8%, to 11,288.02, with Tesla Inc. down around 7%. The company said it will cut vehicle assembly costs by half in future generations of cars, but Chief Executive Elon Musk did not unveil a much-awaited small, affordable electric vehicle. MSCI's broadest index of world shares fell 0.57% to around seven-week lows.
Investor enthusiasm has faded over China's economic reopening after Beijing dismantled its strict COVID-19 controls in December, as analysts look for more evidence to gauge the pace of economic recovery. Stock and bond markets in the past weeks have been driven by different factors, said Kevin Gardiner, global investment strategist at Rothschild & Co. The chief concern in stocks is the expectation of pressured corporate profits, while bonds are sensitive to inflation and rate expectations.
"In the last few months, stock markets have been digesting that despite all of these predictions of imminent collapse in profits, a severe economic downturn has not materialised," he said.
Falling natural gas prices and a clearing of supply chain bottlenecks after Russia's invasion of Ukraine is an overlooked development in capital markets, he said.
"The economic impact of tightening remains a puzzle. Profitability might not be that fragile, at least, not yet," he said. Overnight, both benchmark government bonds and shares had taken a blow, as inflation indicators from Germany and the United States reinforced expectations interest rates would go higher and stay there for longer. Germany's 2-year government bond yield rose to its highest since October 2008.
In the United States, manufacturing activity contracted for a fourth-straight month in February, but a gauge of prices for raw materials increased last month, stoking concerns that inflation would remain stubborn. "Economic data has surprised to the upside," said Steven Oh, global head of credit and fixed income at PineBridge Investments. Any unexpected result in the data would drive policymakers to be more aggressive, and that's reset market expectations, he said.
"Now the question becomes, have we reset expectations sufficiently and where do we go from here?” he said.
PRESSURE POINTS Benchmark 10-year Treasury yields hit a fresh four-month high of 4.066%, while two-year yields also advanced to 4.929%, a fresh 16-year high.
Investors still mostly foresee the Fed raising rates by 25 basis points at its next meeting later this month, but expectations of a larger 50 basis points hike have increased. The probability that the Fed's policy rate, currently set in the 4.5% to 4.75% range, could peak above 5.5%, stood at 53%, compared with 41.5% on Feb. 28, according to the CME Fed tool.
In currency markets, the U.S. dollar index, measuring its value against a basket of major peers, gained 0.54% to $105.045.
The euro lost about 0.7% and the pound dropped 0.86%, with hotter-than-expected inflation numbers adding to pressure on the ECB to raise rates.
In the crypto world, shares in Silvergate Capital plunged by 46% after the cryptocurrency-focused bank said it was delaying its annual report and was evaluating its ability to operate as a going concern. Bitcoin was last down about 1.2% at $23,275. Oil prices pared early gains as signs of a strong economic rebound in top crude importer China were offset by fears over the impact of potential increases to European interest rates. U.S. crude rose 0.51% to $78.09 per barrel and Brent was at $84.64, up 0.39% on the day. Spot gold was slightly lower at $1,834.29 per ounce. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ World FX rates YTD ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Lawrence Delevingne in Boston and Nell Mackenzie and Marc Jones in London. Editing by Tomasz Janowski, Sharon Singleton and Emelia Sithole-Matarise)
