By Chuck Mikolajczak
NEWYORK – A gauge of global stocks dipped on Wednesday while the U.S. dollar and Treasury yields fell after economic data showed signs of a softening labor market and boosted hopes a pause to the Federal Reserve’s interest rate-hiking cycle could be on the horizon.
U.S. private employment increased by 106,000 jobs last month, the ADP National Employment report showed on Wednesday, short of the 178,000 estimate of economists polled by Reuters, although the drop was attributed to bad weather in some parts of the country.
Other data showed that job openings rose to 11.012 million in December from 10.44 million in the prior month, suggesting the labor market remains strong.
Investors have viewed a weaker labor market as a key component to bring down stubbornly high inflation.
The data comes ahead of the Fed’s policy announcement scheduled for 2 p.m. EST (1900 GMT) in which the central bank is largely expected to raise its target interest rate by 25 basis points (bps) but keep a hawkish tone as it seeks to tighten financial conditions. Markets have been pricing in the possibility of a rate cut by the Fed in the back half of the year.
“The market has been easing financial conditions, which has got to be concerning to (the Fed); there is no question about it and that is going to be tricky for them to talk down, so they are going to have to come out with some new and different ways to retain optionality and keep financial conditions tight, if not try to tighten them more from here,” said Jake Remley, senior portfolio Manager at Income Research + Management in Boston.
“This idea they are going to start cutting the rate later this year, they reiterated over and over again they are not going to do that, but the market continues to think this dovish pivot is closer to at the money than they are trying to make it out to be.”
Rates and inflation https://www.reuters.com/graphics/USA-FED/INFLATION/gkvlgnaywpb/chart.png
On Wall Street, U.S. stocks fell in early trading ahead of the Fed announcement, with each of the 11 major S&P sectors lower, led by a 1.53% decline in energy shares.
The Dow Jones Industrial Average fell 320.49 points, or 0.94%, to 33,765.55, the S&P 500 lost 19.66 points, or 0.48%, to 4,056.94 and the Nasdaq Composite dropped 53.64 points, or 0.46%, to 11,530.91.
The Institute for Supply Management (ISM) said that its manufacturing PMI dropped to 47.4 last month from 48.4 in December, showing further contraction as higher rates dented demand for goods, although large layoffs among factory workers had not materialized.
Earnings season also continues to roll on, with Facebook owner Meta reporting earnings after the closing bell on Wednesday. Later in the week will bring earnings from names such as Apple and Amazon.
European shares were slightly higher, aided by a 0.64% gain in industrial stocks. After the Fed announcement, the European Central Bank (ECB) and Bank of England will make their policy statements on Thursday, in which each is largely expected to hike by 50 basis points.
The pan-European STOXX 600 index lost 0.17% and MSCI‘s gauge of stocks across the globe shed 0.08%.
Data on Wednesday showed headline inflation in the euro zone moderated to 8.5% in January, from 9% in December, while core prices picked up to 7% from 6.9%, likely keeping pressure on the ECB to raise interest rates aggressively.
The dollar started February on a lower note, continuing its weakening trajectory of the previous four months. The dollar index fell 0.421%, while the euro was up 0.52% against the U.S. currency at $1.0918.
The Japanese yen strengthened 0.64% versus the greenback at 129.27 per dollar, while Sterling was last trading at $1.2322, up 0.02% on the day.
Longer-dated U.S. Treasury yields also declined, as benchmark 10-year notes were down 2.4 basis points to 3.505%, from 3.529% late on Tuesday, although the two-year yield briefly turned higher after the most recent batch of economic data.
U.S. crude recently fell 0.6% to $78.40 per barrel and Brent was at $84.72, down 0.87% on the day.