DM Monitoring
NEW YORK/LONDON: The dollar eased and stocks on Wall Street and in Europe fell on Tuesday as fading optimism that central banks will soon cut interest rates weighed on sentiment, keeping key pan-European and Japanese stock indices from breaching record highs.
Walmart (WMT.N), opens new tab kicked off the earnings season for U.S. retailers on an upbeat note, helping limit losses on the Dow, but Europe’s broad STOXX 600 benchmark (.STOX), opens new tab and Japan’s Nikkei (.N225), opens new tab remain about 1% below respective record peaks in 2022 and 1989.
Hotter-than-expected U.S. inflation data last week snuffed market expectations for an imminent start to the Federal Reserve’s easing cycle and halted a rally for U.S. stocks in 2024 that was based on an outlook of inflation slowing further.
The Fed will cut the federal funds rate in June, according to a slim majority of economists polled by Reuters who also said the first rate cut would come later than forecast rather than earlier.
The call for further deflation has depended on below-trend economic growth, but the structural foundation for that outlook is wrong as there is little slack in the economy, said Phillip Colmar, global strategist at MRB Partners in New York.
“The whole Goldilocks soft-landing scenario was also wrong,” he said. “We like Goldilocks. But our experience is she doesn’t visit for very long and the risk to the Goldilocks scenario was that we weren’t going to have a soft landing with enough slack in the economy building up to bring down inflation.”
The dollar index , a measure of the U.S. currency against six others, fell 0.30%, while MSCI’s gauge of stocks across the globe (.MIWD00000PUS), opens new tab shed 0.45%. The STOXX 600 index (.STOXX), opens new tab lost 0.09% as markets ignored European Central Bank data that showed the annual growth in negotiated wages across the euro area slowing to 4.5% in the fourth quarter last year, down from 4.7% in the prior period.
The ECB has singled out wages as the single-biggest risk to its 1-1/2 year crusade against inflation.
The tech-heavy Nasdaq led losses on Wall Street as chipmaker Nvidia (NVDA.O), opens new tab, which reports results after markets close on Wednesday, fell 6.2%.
On Wall Street, the Dow Jones Industrial Average (.DJI), opens new tab fell 0.25%, the S&P 500 (.SPX), opens new tab lost 0.78% and the Nasdaq Composite (.IXIC), opens new tab dropped 1.42%.
The response to the interest rate outlook from asset classes other than bonds has been muted so far, but U.S. economic growth compared to elsewhere will likely change the move in lock-step for central bank expectations, said Marvin Loh, senior global macro strategist at State Street in Boston.
Since mid-January the market has reduced rate cut expectations by 60 basis points for the Fed, the same for the Bank of Canada, 37 basis points for the ECB and 57 basis points for the Bank of England, he said.
“This change in the U.S. rates market is an economy that is performing in a way that we’re not seeing in a lot of the other developed markets. Eventually you’re going have to start seeing more separation,” Loh said. The two-year Treasury yield, which reflects interest rate expectations, fell 7.6 basis points to 4.580%, while the yield on the benchmark 10-year note was down 4.1 basis points at 4.254%.
Germany’s 10-year Bund yield, which moves inversely to its price, was down 3.8 basis points at 2.373%, while the euro was 0.32% higher at $1.0814.
The euro zone’s benchmark yield has risen around 35 bps so far this year as bumps in the road to lower inflation and better than feared economic data in most of the world, particularly the United States, has caused markets to push back their late-2023 expectations of significant rate cuts early this year.
Germany’s rate-sensitive two-year yield has risen 40 bps year to date.
