US stocks erased earlier gains after two Federal Reserve members said they expected interest rates to exceed 5 percent in 2023, dampening investor hopes for less restrictive monetary policy.
Wall Street’s blue-chip S&P 500, which was up as much as 1.4 percent earlier Monday, ended 0.1 percent lower on Monday, with pharmaceutical stocks among the detractors. The tech-heavy Nasdaq Composite, which was up nearly 2.3 percent at one point, closed 0.6 percent higher, while Tesla and chipmakers Nvidia and Advanced Micro Devices were up more than 5 percent.
Both indexes fell in afternoon trade after US Federal Reserve Governors in San Francisco and Atlanta commented that the fed funds rate would need to top 5 percent to rein in inflation. Atlanta Fed President Raphael Bostic said the rate should stay above that water mark for a “long time.”
Monday’s hawkish comments contrasted with dovish signal traders Friday derived from U.S. government data showing average hourly employee wages rose a seasonally adjusted 4.6 percent from a year earlier in December, compared with 4.8 percent in the previous month, easing upward pressure on inflation. The world’s largest economy added 223,000 jobs in the final month of 2022 — more than economists had expected but less than November’s 256,000 surge.
Treasury bonds then rallied, with yields on two-year Treasury bills, which are sensitive to interest rate expectations, falling nearly a quarter of a point. On Monday, the yield on the note slipped another 0.05 percentage point to 4.20 percent. Bond yields move inversely with prices.
“The payroll data was the story of Friday’s ‘everything rally’ in bonds and stocks,” said Charlie McElligott, equity derivatives strategist at Nomura, “because that’s what most people see [Fed] as the need for a slowdown in wage growth to accompany disinflationary progress elsewhere to signal tangible progress towards their price stability goals.”
The Fed raised interest rates from near zero to between 4.25 and 4.5 percent last year. Interest rate markets are pricing in around a 75 percent chance that the central bank will hike borrowing costs by a quarter of a point at its late January meeting. US inflation data released on Thursday is expected to show prices rising 6.6 percent year-on-year in December, after rising 7.1 percent in November. That would be the slowest pace since October 2021. San Francisco Fed Chair Mary Daly on Monday backed the idea of a quarter-point hike by the end of the month.
An index tracking the dollar’s strength against a basket of six peers fell 0.7 percent on Monday as traders continued to bet the Fed will hike rates more slowly in the early months of 2023. The currency has fallen more than 8 percent over the past three months.
“The US economy remains resilient but is in a downtrend,” said Florian Ielpo, head of macro at Lombard Odier Asset Management. Still, the slowing of inflation in Europe and China’s easing of strict zero-Covid policies meant the direction for “most risky asset classes was the same – globally up,” he added.
Europe’s regional Stoxx 600 climbed 0.9 percent, contributing to last week’s 4.2 percent gain, with technology and energy stocks among the top performers. London’s FTSE 100 rose 0.3 percent.
Germany’s Dax gained 1.3 percent after production in the country’s manufacturing, energy and construction sectors rose 0.2 percent between October and November, raising hopes of a milder-than-feared economic downturn across the united kingdom currency area.
Euro-zone inflation slipped back into single digits in December, with data released late last week showing the headline rate hit 9.2 percent after annual price growth topped 10 percent in the previous two months.
Figures on Monday showed that unemployment in the region fell to a 24-year low in November, but this is increasing pressure on the European Central Bank to hike interest rates further.
In Asia, Hong Kong’s Hang Seng index rose 1.9 percent and China’s CSI-300 index of stocks listed in Shanghai and Shenzhen rose 0.8 percent.
Oil prices, meanwhile, rose, with Brent crude, the international oil benchmark, rising 1.4 percent higher to $79.65 a barrel on expectations of higher demand. Prices of the Dutch TTF, the European benchmark gas contract, rose 9.9 percent on Monday to €74.40 per megawatt hour.