Yellen Rate Remarks Halt U.S. Stock Rally as Dollar Strengthens

Can Fed Increase Rates While Other Central Banks Ease?
  • Fed chair says December meeting `live possibility' for hike
  • Emerging currencies slide with Treasuries; oil also sinks

Janet Yellen halted the U.S. equity rally, fueled gains in the dollar and sent two-year Treasury yields to their highest level since 2011 after she said the U.S. economy is performing well and December remains a “live possibility” for higher interest rates.

The Standard & Poor’s 500 Index fell from a three-month high, while the dollar strengthened against emerging-market currencies as the Federal Reserve chair said improvements in the economy had set the stage for a potential rate increase by the end of the year. Two-year Treasury yields topped 0.80 percent after the comments pushed the odds of a December rate hike to 58 percent. Oil retreated as crude inventories rose.

“We’ve come back a long way since the end of September, but we’re not going to go straight back to a record,” said Thomas Garcia, head of equity trading at Thornburg Investment Management Inc. in Santa Fe, New Mexico. “Investors are waiting to get more data points this week to assess a potential rate hike in December. Technicals may also be playing a role in keeping us from going much higher today.”

Yellen’s comments came during testimony to the U.S. Congress and followed a private report on payrolls that signaled steady improvement in the local labor market. The Fed chief indicated there was an increased likelihood of a rate increase at the bank’s last 2015 meeting should economic data continue to assure policy makers of an acceleration in inflation over time. The government’s own monthly jobs report is due Friday, one of two sets of data on hiring before the Fed’s December meeting.

Rate tops 0.80, highest since 2011
Rate tops 0.80, highest since 2011

Stocks

The S&P 500 fell 0.4 percent to 2,102.31 by 4 p.m. in New York, sending the gauge down from its highest level since July. The U.S. benchmark has recovered from an August selloff sparked by China’s surprise currency devaluation, and is poised to retake its May record. Energy and commodity producers, two of the biggest decliners in the third-quarter selloff, have paced the recovery.

Earnings news also weighed on sentiment Wednesday as disappointing results from Time Warner Inc. and 21st Century Fox Inc. sent media companies to their steepest decline since August. Energy shares followed oil lower, falling for the first time in six sessions.

Facebook Inc. jumped as much as 5.1 percent in extended trading after reporting third-quarter earnings that exceeded analysts’ estimates.

In Europe, shares of commodity producers drove the Stoxx Europe 600 Index up 0.5 percent in a third day of gains. Glencore Plc rallied 5.4 percent after saying its profit from trading commodities rebounded, while carmakers slid, dragged lower by a 8.5 percent slide in Volkswagen AG. The company said it found faulty emissions readings for the first time in gasoline-powered vehicles, widening a scandal.

Shares traded in Hong Kong led gains in Asia, with the MSCI Asia Pacific Index climbing 0.9 percent on Wednesday as Japanese markets returned from a holiday.

Currencies

The dollar rose to its highest level in more than three months against the euro after the ADP Research Institute’s jobs report showed hiring in the U.S. expanded more than forecast last month, supporting speculation of a rate increase in December.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency versus 10 of its peers, added 0.7 percent after trading little changed on Tuesday and falling over the three days before that. The greenback climbed 0.9 percent to $1.0862 per euro and gained 0.4 percent to 121.57 yen.

“It’s all about the interest rate outlook,” said Stuart Bennett, London-based head of Group-of-10 currency strategy at Banco Santander SA. “The market seems willing to sell the euro come what may. If the U.S. data is a little bit soft or European data isn’t too bad it doesn’t make any difference. Everything is irrelevant aside from that interest rate story.”

Emerging Markets

The MSCI Emerging Markets Index rose 0.7 percent to touch a three-month high as benchmark gauges in China, Taiwan and Indonesia climbed at least 1.7 percent. A Bloomberg index of developing nation currencies slid 0.6 percent as the dollar rallied.

The Shanghai Composite Index jumped 4.3 percent, its biggest advance since Sept. 16. Chinese economic growth should be no less than 6.5 percent in the next five years to realize the goal of doubling 2010 gross domestic product and per capita income by 2020, President Xi Jinping said late Tuesday, according to the official Xinhua News Agency.

Bonds

Ten-year Treasuries fell, sending yields to a six-week high, while two-year rates jumped to the highest since 2011. Traders see a 58 percent chance that the Fed will raise its benchmark rate in December, according to futures data compiled by Bloomberg.

Yields on 10-year Treasury notes rose by two basis points, or 0.02 percentage point, to 2.23 percent, while two-year rates climbed five basis points to 0.82 percent. The Treasury’s sale of two-year debt drew the weakest demand for the maturity since 2010.

Commodities

The Bloomberg Commodity Index dropped 1.3 percent as crude oil tumbled after a government report showed U.S. inventories rose for a sixth straight week. West Texas Intermediate crude slipped by 3.3 percent to $46.32 a barrel. Brent was down 3.9 percent to $46.32.

Gold touched a one-month low as investors added to their bets on a December U.S. rate rise. Futures for December delivery dropped 0.7 percent to settle at $1,106.20 an ounce in New York, after touching $1,105.60, the lowest since Oct. 2.

Copper advanced to its highest level in almost a week amid a rally in industrial metals after Glencore said it will cut more production at its mines through 2017. Futures for delivery in three months rose 0.2 percent to settle at $5,134 a ton in London.

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