By Herbert Lash and Dhara Ranasinghe
Global stock markets extended a New Year slide on Wednesday and the dollar edged higher as concerns about the chances of a soft landing mounted, while the latest hostilities in the Middle East added to downbeat market sentiment.
The yield on benchmark 10-year Treasury notes briefly climbed above 4% as market optimism about interest rate cuts ebbed despite bullish comments about the U.S. labor market by Richmond Federal Reserve President Thomas Barkin.
A soft landing is “increasingly conceivable” as the Fed makes “real progress” toward taming inflation without inflicting major damage on the jobs market, Barkin said.
MSCI’s broad index of world equities slipped 1.0% to its lowest level in almost two weeks, with the major European bourses down more than 1% and Wall Street indices all lower too. Asia Pacific shares outside Japan shed 1.5%.
The market is trying to figure out if a soft landing is possible with the six rate cuts by year-end the futures market is currently pricing in or if that scenario will be painful, said Anthony Saglimbene, chief market strategist at Ameriprise Financial in Troy, Michigan.
“Usually when you get that type of aggressive interest rate cuts, it comes with more economic pain,” Saglimbene said. “Our view is that the market is probably priced in too many rate cuts for this year.”
Caution ticked up ahead of the release of minutes from the Fed’s last policy meeting in 2023, due at 2 p.m. ET (1900 GMT), as well as the U.S. unemployment report for December on Friday.
Fed officials in December predicted 75 basis points (bps) of rate cuts this year, driving money market bets for around double that amount and market optimism that prompted a year-end rally in stocks and bonds.
“We had that whacking great rally at the end of last year when markets convinced themselves there will be a soft (economic) landing, cooling inflation and a rapid pivot to rate cuts,” AJ Bell investment director Russ Mould said.
“But if you get an unexpected hard landing or an inflationary boom, you might get a slightly different script, so I guess people are now pausing for reflection.”
Resilience in the U.S. labor market has kept a recession at bay. The government is expected to report on Friday that non-farm payrolls increased by 168,000 jobs in December, according to a Reuters survey of economists, after rising 199,000 in November.
But labor market conditions are gradually easing. U.S. job openings dropped by 62,000 to 8.79 million for the third straight month in November, the Labor Department said on Wednesday.
Market sentiment, meanwhile, also was undermined by souring tensions in the Middle East.
Hamas deputy leader Saleh al-Arouri was killed on Tuesday in an Israeli drone strike in Lebanon’s capital Beirut, Lebanese and Palestinian security sources said, raising the risk of war in Gaza spreading well beyond the Palestinian enclave. Israel has neither confirmed nor denied that it killed Arouri.
Denmark’s Maersk and German rival Hapag-Lloyd said on Tuesday their container ships would continue to avoid the Red Sea after a series of attacks on vessels blamed on Houthi militants.
The pan-European STOXX 600 index lost 1.03%, while on Wall Street, the Dow Jones Industrial Average fell 0.78%, the S&P 500 lost 0.74% and the Nasdaq Composite dropped 0.94%. U.S. Treasury yields continued to edge higher. The yield on the 10-year Treasury note rose 4.9 basis points at 3.993%.
Germany’s 10-year Bund yield was down 1.9 basis points at 2.046%.
The dollar has gained more than 1% against major currencies this week, with the dollar index touching a fresh two-week high at 102.6 as rate cut bets eased.
The euro fell 0.37% to $1.0906 and the yen weakened 1.12% at 143.57 per dollar.
U.S. crude recently rose 3.25% to $72.67 per barrel and Brent was at $78.23, up 3.08% on the day.
Spot gold dropped 1.2% to $2,033.99 an ounce.