Global stocks retreat, Treasury yields rise as rate cut optimism fades

By Herbert Lash and Elizabeth Howcroft

NEW YORK/LONDON (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)