(Adds dateline, byline, comment in paragraphs 4-6, updates
prices at 10:49 a.m. ET)
NEW YORK/LONDON, Jan 2 (Reuters) – Stocks on Wall Street
and in Europe fell on Tuesday, along with prices for U.S. and
other government debt, as market optimism that the Federal
Reserve will cut interest rates sharply this year faded.
The dollar jumped against major currencies as the yield on
the 10-year Treasury note rebounded to trade above 4% at one
point.
The U.S. benchmark’s yield, which moves inversely to price,
last week traded as low as 3.783%, or below the 150 basis points
of rate cuts the futures market had priced in by December for
the Fed’s overnight lending rate.
The dollar strengthened because its recent sell-off was
overdone while the unemployment report for December this Friday
will show a still robust U.S. labor market, said Marc Chandler,
chief market strategist at Bannockburn Global Forex in New York.
“When the Fed meets later this month they’re going to see
above-trend growth and a resilient labor market. A resilient
labor market means income, which means demand, that’s why the
dollar is recovering,” Chandler said.
A Reuters polls shows economists expect 168,000 jobs were
created last month, down from 199,000 in November, and the
unemployment rate will tick up to 3.8% from 3.7%.
The dollar index, a measure of the U.S. currency
against six major trading partners, rose 0.779%. The euro was
down 0.87% at $1.0948 and the yen rose 0.76% to 141.940.
In Europe, the pan-regional STOXX 600 index lost
0.25% while MSCI’s gauge of stocks across the globe
shed 0.87%.
On Wall Street, the Dow Jones Industrial Average rose
0.07%, the S&P 500 lost 0.72% and the Nasdaq Composite
dropped 1.85%.
The three major U.S. stock indexes had notched monthly,
quarterly and annual gains last Friday as traders priced in
higher chances of rate cuts by the Fed this year. The benchmark
S&P 500 ended last week within 1% of a record closing high
reached on Jan. 3, 2022.
Futures show traders expect almost an 80% chance of a 25
basis point cut in the Fed’s overnight rate when policymakers
meet in March, according to the CME Group’s FedWatch Tool.
Traders see the Fed’s target rate at 3.829% in December
.
Traders are seeking clues as to whether major central banks
will judge inflation has slowed enough to allow for deep rate
cuts.
“There is a feeling that (monetary) easing is coming and it
seems like there is more to go in the rally in the short term,”
said Nordea chief analyst Jan von Gerich.
“I think there’s a risk to the downside for stocks but the
momentum is strong right now,” he said.
Oil prices jumped more than 2%, in a move analysts said was
due to an escalation in tensions in the Red Sea as well as hopes
for strong demand from China, where investors are expecting
fresh stimulus measures.
U.S. helicopters repelled an attack on Sunday by Iran-backed
Houthi militants on a Maersk container vessel in the Red Sea,
sinking three Houthi boats and killing 10 militants. Investors
are weighing up the risks of the Israel-Gaza war becoming a
wider regional conflict, which could close crucial waterways for
oil transport.
U.S. crude rose 0.32% to $71.88 per barrel and Brent
was at $77.39, up 0.45% on the day.
Separately, the head of energy firm E.ON said
instability in the Middle East could send energy prices soaring,
but that Germany’s gas supply is in far better shape than it was
after Russia cut off supplies last winter.
Data pointing to subdued business confidence in China for
2024 weighed on Chinese assets during Asian trading. China’s
onshore blue chip index was down 1.3% and Hong Kong’s
Hang Seng index fell 1.5%.
The yield on the 10-year Treasury note rose 8.1
basis points to 3.941%.
Euro zone government bond yields rose, with the benchmark
10-year German yield up 2.8 basis points on the day
at 2.057%.
Spot gold dropped 0.2% to $2,058.39 an ounce.
(Reporting by Herbert Lash, additional reporting by Elizabeth
Howcroft and Dhara Ranasinghe in London; editing by Jason Neely,
David Evans and Nick Macfie)
