Stocks head south as Fed chair sows rate cut doubts

By Naomi Rovnick and Nell Mackenzie

LONDON (Reuters) – The U.S. dollar was poised for a big weekly gain on Friday, towering near one-year peaks as Federal Reserve rate cut doubts also weighed on Treasuries and world stocks.

Fed Chair Jerome Powell said on Thursday there was no need to rush rate cuts to support a robust U.S. economy, and while he has pledged not to pre-empt President-elect Donald Trump’s policies, traders sharply re-priced the outlook.

The dollar index, which tracks the U.S. currency against peers including the euro and Japan’s yen, was 0.3% lower on the day but headed for a 1.5% weekly rise.

Wall Street stocks were also headed for a second daily loss, with futures contracts tracking the S&P 500 index 0.6% lower.

Nasdaq 100 futures dropped 0.8%, reflecting the deeper impact on tech stocks from higher government bond yields, which raise the relative cost of betting on speculative businesses’ future earnings.

While Trump’s Nov. 5 victory drove U.S. equities to records last week as traders bet on his tax cutting and deregulation agenda lifting corporate earnings, doubts are building over how far the Fed can cut borrowing costs from here.

After the sugar hit of Trump’s election and its subsequent impacts on expectations for company profits, the market’s enthusiasm is being watered-down by greater interest rate uncertainty, especially going into next year,” said Kyle Rodda, a senior analyst at Capital.com.

Goldman Sachs now sees a greater risk that the Fed could slow the pace of easing sooner, possibly as soon as the December or January meetings, while JPMorgan still tips the Fed to cut in December and a slow down after.

Fed funds futures now imply just 71 basis points of rate cuts by the end of 2025 and a reduction next month is no longer viewed as a high probability event, with markets pricing a 61% chance, down from 82.5% a day ago.

Two-year Treasury yields, which track interest rate expectations and rise as the price of the debt falls,, rose 2 basis points (bps) to 4.32%, up 7 bps for the week. The 10-year Treasury yield traded at 4.43% on Friday after a 13 bp weekly rise.

European shares fell 0.4% on Friday to head for their fourth straight weekly drop and the euro, at $1.056, was heading for a 1.4% weekly decline against the dollar and remained close to a one-year low.

Threats of Trump bringing in punitive import tariffs have hit European exporters’ shares hard, while the collapse of Germany’s government has further deepened the gloom over European stocks and the euro.

Investors are also concerned about higher yields on U.S. government debt raising euro area borrowing costs, hitting business activity and the region’s weakened economy.

“It’s much more difficult for us (to take higher rates) as we don’t have the fiscal space and we don’t have the dollar,” Carmignac economist Raphael Gallardo said.

European healthcare stocks also dropped 2.2% on Friday after Trump selected Robert F. Kennedy Jr, an environmental activist who has spread misinformation on vaccines, to lead the top U.S. health body.

Asian markets traded on a steadier note, helped by Chinese data showing retail sales in the world’s second-biggest economy beat forecasts in October in a sign that Beijing’s stimulus programme could be lifting consumer sentiment.

Hong Kong’s Hang Seng index, and China’s blue-chip index both ended the day flat, as data also showed disappointing Chinese industrial output growth and further property investment declines.

Japan’s benchmark Nikkei average closed 0.3% higher.

Dollar gains have sent gold prices 4.2% lower this week to $2,572, bringing the monthly loss so far to 6.2%.

Brent crude futures fell 1% to $71.86, on prospects of U.S. supply rising under Trump’s energy policies.

(Reporting by Naomi Rovnick and Nell Mackenzie. Additional reporting by Stella Qiu.; Editing by Mark Potter)