By Herbert Lash
NEW YORK (Reuters) – The dollar eased and yields at first fell on Tuesday as data showing slower economic growth raised initial hopes the Federal Reserve will back off its aggressive hiking of interest rates at its central bank symposium at Jackson Hole, Wyoming on Friday.
But yields later rose and stocks retreated as the view that the Fed will reiterate a hawkish message seemed to hold greater sway, even as market bets on how much the U.S. central bank will hike rates in September flipped back and forth all day.
Gold snapped a six-session losing streak as the dollar weakened while oil rose almost 4% after Saudi Arabia floated the idea of output cuts from the Organization of the Petroleum Exporting Countries and its allies.
Sales of new U.S. single-family homes plunged to a 6-1/2-year low in July while a survey from S&P Global showed its measure of private sector business activity fell to a 27-month low, suggesting Fed efforts to tame inflation were working.
“The Fed has been fairly consistent in trying to sound as hawkish as it can,” said Marvin Loh, senior global market strategist at State Street in Boston. “The animal spirits were better for risk over the summer based on the view that we were near the end of the hiking cycle.”
But Goldman Sachs said in a note that it expected Powell to reiterate the case for slowing the pace of tightening as indicated in his July press conference and the minutes released last week from that meeting of policymakers.
Powell is likely to balance that message by stressing that Fed “remains committed to bringing inflation down and that upcoming policy decisions will depend on incoming data,” Goldman said.
The U.S. economy looks poised for an energy price shock in the winter, with natural gas prices at their highest since 2008, said Bill Adams, chief economist for Comerica Bank in Dallas.
With demand cooling, another big negative shock looks likely and a recession is also more likely than not between now and mid-2023, if one is not already underway, Adams said.
The Dow Jones Industrial Average fell 0.47%, the S&P 500 slid 0.22% and the Nasdaq Composite closed flat.
The dollar index fell 0.422% as the euro rebounded, rising 0.24% to $0.9965 and the yield on 10-year Treasury notes was up 2.6 basis points to 3.061%.
Markets have see-sawed on whether the Fed will raise rates by 50 or 75 basis points next month. The probability of a 75 basis point hike is 52.5% and the smaller hike is at 47.5%, bets that reversed throughout the day.
Earlier the euro fell to fresh two-decade lows after data showed euro zone business activity contracted for a second straight month in August as the war in Ukraine is expected to ensure the outlook for the European economy remains bleak.
China’s yuan weakened to a two-year low and sterling briefly touched its weakest since March 2020 benefited the dollar.
While the S&P flash composite Purchasing Managers’ Index (PMI) of business activity in Europe was not as bad as feared, analysts said more grim news for the economy is likely given how gas prices have surged to record highs ahead of winter.
MSCI’s global stock index slid 0.26%, while the STOXX index of European company shares closed down 0.42%, having fallen for nearly a week.
Benchmark gas prices in the European Union surged 13% overnight to a record peak, having doubled in just a month to be 14 times higher than the average of the past decade. [NG/EU]
Europe was braced for fresh disruption in energy supplies from Russia.
Euro slumps to 20-year lows against the robust dollar: https://tmsnrt.rs/3wnoLw7
Asian shares were down for a seventh straight session on Tuesday after the renewed spike in European energy prices stoked fears of recession and pushed bond yields higher, while tipping the euro to 20-year lows.
Unease over China’s economy continued to percolate as a cut in lending rates and talk of a fresh round of official loans to property developers underlined stresses in the sector.
Chinese blue chips were off 0.5%, while the yuan fell to an almost two-year low. [CNY/]
The Nikkei lost 1.2% after a PMI survey showed factory activity in Japan slowed to a 19-month low in August.
Crude prices gained as Saudi Arabia warned that the OPEC+ producer alliance could cut output. [O/R]
U.S. crude futures rose $3.38 to settle at $93.74 per barrel and Brent settled up $3.74 at $100.22.
U.S. gold futures settled up 0.7% at $1,761.20.
Summer’s Over: https://tmsnrt.rs/3wrKHGn
(Reporting by Herbert Lash, additional reporting by Huw Jones, Ashitha Shivaprasad and Wayne Cole; Editing by Mike Harrison, Chizu Nomiyama, Josie Kao and Alison Williams)