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Yields rise on Fed fears of cutting rates too soon, stocks mixed

Published 21/02/2024, 01:28 pm
Updated 22/02/2024, 09:17 am
© Reuters. FILE PHOTO: Passerbys walk past an electric screen showing Asian markets indices outside a brokerage in Tokyo, Japan, July 1, 2019.  REUTERS/Issei Kato/File Photo

By Herbert Lash

NEW YORK (Reuters) -Treasury yields rose on Wednesday after minutes from the Federal Reserve's last meeting showed concerns about cutting interest rates too soon, while global shares closed flat ahead of Nvidia results that could determine the near-term outlook for equities.

Nvidia jumped more than 7% in after-hours trade after it forecast fiscal first-quarter revenue above estimates compiled by LSEG. The chipmaker banked on towering demand for its industry-leading artificial intelligence chips and improving supply chain dynamics.

The minutes kept market sentiment subdued as the bulk of Fed policymakers worried about moving to quickly to cut rates amid broad uncertainty about how long borrowing costs should stay at their current level, minutes of the Jan. 30-31 meeting showed.

The two-year Treasury yield, which reflects interest rate expectations, rose 5.8 basis points to 4.670%, and MSCI's gauge of stocks across the globe pared earlier losses to close down 0.04%.

"I don't think the minutes really told us anything new. The markets have basically already done the Fed's work for them in terms of pricing out chances of a March rate cut and for a bunch of cuts down the road," said Kim Rupert, managing director of global fixed income at Action Economics in San Francisco.

Policymakers are concerned that the economy is going to limit further disinflationary trends, or at least has the potential to see progress on inflation stall out, she said.

"There's some very small risk of a hike that's been priced in just because of the hotter-than-expected inflation numbers" last week, Rupert said.

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A slim majority of economists polled by Reuters now expects the Fed to start cutting rates in June, farther out than market expectations last month of a first cut in March.

Markets now expect 86 basis points (bps) of cuts from the Fed this year, closer to the U.S. central bank's own projection of 75 bps of easing - or half the 150 bps of cuts priced in by traders at the start of the year.

Stocks fell in Europe as shares in HSBC tumbled 8.4% in its biggest single-day decline since April 2020, after a shock $3 billion charge on its stake in a Chinese bank took the shine off record annual profit at the region's largest bank.

The pan-European STOXX 600 index closed down 0.17%.

Investors expressed concerns that only marginally meeting or beating expectations would lead Nvidia to suffer dramatically and lead investors to pull back.

On Wall Street, the Dow Jones Industrial Average rose 0.13%, the S&P 500 gained 0.13% and the Nasdaq Composite dropped 0.32%.

The change in interest rate expectations outlook boosted the dollar and kept the yen, which is extremely sensitive to U.S. rates, near three-month lows.

The dollar has had a nice run and is probably at the top of a range at the moment, said Noel Dixon, a vice president of global macro strategy at State Street (NYSE:STT) Global Markets in Boston.

"We just need to see more data before we can break out of that range. That'll take probably until we get to the May or June time frame," he said.

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The dollar index fell 0.038%, with the euro up 0.12% to $1.0816. The Japanese yen weakened 0.18% to 150.27 per dollar.

Steps by Chinese authorities to prop up economic growth in the world's largest raw materials consumer revived doubts about the growth outlook, which weighed on crude oil and iron ore.

Chinese blue-chip stocks posted a 1.4% gain on the day, a day after the biggest reduction yet in the nation's benchmark mortgage rate as authorities stepped up efforts to support the property market.

Oil prices rose 1% as geopolitical tensions raged on in the Middle East and traders assessed signs of near-term supply tightness.

U.S. West Texas Intermediate crude futures (WTI) rose 87 cents to settle at $77.91 a barrel, while Brent crude finished up 69 cents to $83.03 a barrel.

Iron ore futures declined for a third consecutive session to their lowest in nearly four months.

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