Dollar, stocks slip on fading rate cut expectations in global markets

NEW YORK: The dollar lowered and a gauge of global stock performance fell on Tuesday as fading optimism that central banks will soon cut interest rates dampened sentiment, leaving key pan-European and Japanese stock indices just below their all-time highs.

Europe’s broad “STOXX 600 benchmark .STOXX” and Japan’s “Nikkei .N225” remain about 1 per cent off their peaks, while a weeks-long rally on Wall Street stalled, despite stellar results from “Walmart WMT.N” that lifted its shares to a record high.

Higher-than-expected US inflation data last week pushed back expectations for an imminent start to the Federal Reserve’s easing cycle. A rate cut is now expected in June, according to a slim majority of economists polled by Reuters, who also flagged risk of a further delay in the first cut.

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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 US 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 “=USD”, a measure of the US currency against six others, fell 0.24 per cent, while MSCI’s gauge of stocks across the globe “.MIWD00000PUS” shed 0.35 per cent.

The “STOXX 600 index .STOXX” closed down 0.10 per cent as markets ignored European Central Bank data that showed the annual growth in negotiated wages across the euro area slowing to 4.5 per cent in the fourth quarter last year, down from 4.7 per cent in the prior period.

The ECB has pointed to wages as the biggest risk to its one to half a year year crusade against inflation. An ECB analysis of salary agreements indicates wage growth will remain high this year, while the number of companies that expect price increases is rising again, “Commerzbank” senior economist Marco Wagner said in a note.

The tech-heavy Nasdaq led losses on Wall Street as chipmaker “Nvidia NVDA.O” fell 4.4 per cent. Nvidia will report results after markets close on Wednesday, .

On Wall Street, the Dow Jones Industrial Average fell 0.17 per cent, the “S&P 500 .SPX” lost 0.60 per cent and the “Nasdaq Composite .IXIC” dropped 0.92 per cent.

The response to the interest rate outlook from asset classes other than bonds has been muted so far, but US economic growth compared to elsewhere will likely change the lock-step move 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 US 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 US2YT=RR Treasury yield, which reflects interest rate expectations, fell 4.8 basis points to 4.608 per cent, while the yield on the benchmark 10-year note US10YT=RR was down 2.4 basis points at 4.271 per cent.

Germany’s 10-year Bund yield, which moves inversely to its price, was down 0.7 basis points at 2.378 per cent, while the euro was 0.29 per cent higher at $1.0811. EUR=EBS

Germany’s rate-sensitive two-year yield has risen about 40 bps year to date. DE2YT=RR

Chinese rate cut

China’s five-year loan prime rate was lowered by 25 basis points to 3.95 per cent, bigger than the five to 15 bp cuts forecast by economists. The one-year rate was left at 3.45 per cent, helping “blue chips .CSI300” to finish the day up 0.2 per cent, after an earlier fall, and Hong Kong’s “Hang Seng index .HIS” to rise 0.6 per cent.

The yuan touched its lowest in three months in early trade before steadying at 7.1925.

The dollar weakened after China cut rates in a bid to prop up its struggling property market, raising hopes of additional stimulus that would boost global growth.

The yen gained but stayed below the 150.88 per dollar level reached last Monday, its weakest in eleven weeks, as investors focus on whether renewed weakness in the Japanese currency is likely to prompt intervention.

Oil prices fell more than 1 per cent, with worries about global demand offsetting price support from the Israel-Hamas conflict.

Brent futures LCOc1 settled down $1.22 to $82.34 a barrel. The six-month spread for “Brent LCOc1-LCOc7” on Tuesday was at its highest since October, a sign of a tighter market.

US West Texas Intermediate (WTI) crude for March delivery CLc1, which expires Tuesday, settled down $1.01 at $78.18 a barrel. The more actively traded April WTI contract CLc2 settled down $1.30 at $77.04 a barrel.

Gold prices climbed to their highest level in more than a week as the dollar retreated.

US gold futures settled 0.8 per cent higher at $2,039.80 an ounce.