U.S. Stocks Fall With Bonds on Hawkish Fed Comments; Oil Climbs

  • Dudley says market “too complacent” on need for rate hike
  • Yen spikes beyond 100 per dollar, weighing on Nikkei futures

Alberto Gallo: Investors Fear Central Bank Monster

U.S. stocks fell with Treasuries, while the dollar pared its decline, after Federal Reserve officials stoked speculation over interest-rate increases despite evidence of uneven growth in the world’s largest economy.

The S&P 500 Index retreated from a record high after New York Fed President William Dudley said borrowing costs could be boosted as soon as next month, while Atlanta Fed chief Dennis Lockhart said he’s confident growth is accelerating, setting the stage for at least one hike this year. Yields on two-year Treasury notes, the coupon maturity most sensitive to policy expectations, climbed as the greenback trimmed a drop of more than 1 percent versus major peers. Oil rose above $46 a barrel on optimism over a potential output freeze.

Equities have found favor over the past month, while the dollar has lost ground, as conflicting signals over the U.S. labor market and growth cast doubt over the Fed’s plans to tighten monetary policy. Odds on the next U.S. rate rise have been pushed out as central banks elsewhere inject unprecedented stimulus, with investors pricing in about one hike between now and the end of next year - estimates Dudley says are “too low.” The policy maker said in an interview Tuesday that markets are “too complacent” about the need for a gradual increase in short-term interest rates over the next year or so.

“Dudley wants to keep expectations grounded,” said Yousef Abbasi, a global market strategist at JonesTrading Institutional Services LLC. in New York. “You have seen some stronger employment data, but other pieces of data are showing a struggle still - retail sales, inflation reads have been among recent disappointments. It’s just reality - rates might move higher by December if jobs data continue to come in better.”

With traders sifting through U.S. economic reports to gauge prospects for growth, figures Tuesday showed home construction unexpectedly accelerated in July to the fastest pace in five months as factory production increased more than forecast. The cost of living in the U.S. was little changed, however, a sign subdued inflationary pressures would still give policy makers reason to keep interest rates low.

For more on Dudley’s commentary, click here.

The probability of a rate increase by the end of 2016 edged up to 52 percent on the Fed officials’ comments, from 45 percent a week ago, according to Fed funds futures tracked by Bloomberg.

Stocks

The S&P 500 fell 0.6 percent to 2,178.15 as of 4 p.m. in New York, after recent gains pushed its valuation the highest level since 2002.

Phone and utilities shares led declines Tuesday, falling at least 1.2 percent. Praxair Inc. surged on merger talks with Germany’s Linde AG, and Morgan Stanley climbed to a seven-month high after activist Jeff Ubben’s ValueAct Capital Management disclosed a 2 percent stake. Cintas Corp. jumped to a record after agreeing to buy G&K Services Inc. in a $2.2 billion tie-up of providers of workplace uniforms and corporate apparel.

The MSCI Emerging Markets Index halted an eight-day rally, dropping less than 0.1 percent. Stocks in Qatar climbed after FTSE Russell said it would relax the criteria to decide which of the nation’s shares will join its developing-nations index next month.

The Stoxx Europe 600 Index dropped 0.8 percent as gains in the euro weighed on exporters. Volkswagen AG slipped after a report that the U.S. Department of Justice was said to find evidence of criminal acts in a diesel-emissions cheating probe.

Futures on Asian equities were mixed following a Japan-led drop on Tuesday. Contracts on the Nikkei 225 Stock Average slipped at 1.8 percent in Chicago, while those on Hong Kong’s Hang Seng Index advanced 0.1 percent. FTSE China A50 Index futures gained 0.3 percent in most recent trade.

Bonds

Yields on 10-year Treasuries rose two basis points, or 0.02 percentage point, to 1.57 percent, after climbing four basis points last session. Rates on two-year notes increased two basis points to 0.75 percent, the highest closing yield this month.

After liftoff from near zero in December, The Fed has twice cut its projections for the number of rate hikes this year, from four to two and then one. Investors will be scouring minutes of the Federal Open Market Committee’s July meeting out Wednesday for further insight into officials’ latest thinking.

“Dudley definitely had an impact on the market,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP, one of the 23 primary dealers that trade with the Fed.  “The market’s still not pricing it in,” Lederer said of a 2016 Fed hike, “but the truth is a lot of people are expecting it,” he said.

The odds of a rate increase at the Sept. 20-21 meeting of the FOMC are about 22 percent, according to pricing in federal funds futures, compared with 24 percent a week ago.

Long-dated U.K. government bonds fell after investors lined up to sell them to the Bank of England in the first successful purchase operation of that debt segment since the bank expanded its quantitative-easing program this month.

Currencies

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major counterparts, fell 0.7 percent, declining for a third straight session.

The yen briefly strengthened past 100 per dollar for the first time since the aftermath of the U.K.’s vote to leave the European Union, before ending Tuesday up 0.9 percent to 100.31. The pound rose 1.3 percent to $1.3046, after dropping to its weakest closing level since June 1985 on Monday. The Canadian dollar climbed for a seventh day, the currency’s longest winning streak since December 2012.

The MSCI Emerging Markets Currency Index rose to its highest point since June 2015. South Korea’s won led gains among 24 developing-nation currencies, while Mongolia’s tugrik, the world’s worst-performing currency in August, weakened for a 22nd day to the lowest level in data compiled by Bloomberg going back to 1993.

Commodities

Oil closed at its highest price in five weeks, bolstered by the weakening dollar and speculation that OPEC talks next month could result in a deal to stabilize prices via a freeze on output. West Texas Intermediate crude gained 1.8 percent to $46.58 a barrel, rising for a fourth straight day.

Russian Energy Minister Alexander Novak told Arabic-language newspaper Asharq Al-Awsat that the nation was open to cooperating to stabilize markets after Saudi Energy Minister Khalid Al-Falih said talks in Algiers may result in action.

“The longer they can put that story out there that there’s going to be a potential production cap, the better they’ll be able to support prices,” said Bob Yawger, director of the futures division of Mizuho Securities USA Inc. in New York. “There is no coincidence that this is happening.”

Nickel dropped after posting the biggest advance in more than two weeks on Monday, while gold and copper advanced. Oil’s bounce helped drive the Bloomberg Commodity Index up 0.6 percent to its highest level in almost a month.

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