Wall Street slips, dollar gains as Fed seen hiking rates in May

By Herbert Lash

NEW YORK (Reuters) – U.S. stock indexes fell and the dollar rose on Monday after strong jobs data last week suggested the Federal Reserve will hike interest rates in May, while the yen weakened after Japan’s new central bank governor vowed to maintain ultra-loose policy.

Gold prices slipped below the key $2,000 level due to a resurgent dollar, while Treasury yields rose on growing market expectations that the Fed will hike rates when policymakers conclude a two-day meeting on May 3.

Consumer price index data on Wednesday will encourage the market to see a rate hike next month, but the more important data will be Thursday and Friday when reports will show the extent of banks’ emergency funding, said Marc Chandler, chief market strategist at Bannockburn Global Forex, in New York.

“My sense is that the labor market and CPI would favor the Fed raising rates again. However, what has made the market have second thoughts is the extent of the tightening of lending,” he said.

“We saw in the last two weeks there’s a record decline in commercial and industry loans,” he said.

Futures show a 69.3% likelihood the Fed will raise rates by 25 basis points in May, according to CME Group’s FedWatch tool.

With recession worries mounting, investors are betting the tumult in the banking system sparked by the sudden collapse of Silicon Valley Bank on March 10 will tighten credit conditions.

But traders also are betting that the Fed will cut rates in the second half to ward off an economic downturn.

Minutes of the Fed’s policy meeting in March are also scheduled to be released on Wednesday.

Trading was light as markets were closed in Europe, Australia and Hong Kong for Easter.

The dollar index rose 0.735% and the two-year Treasury yield, which typically moves in step with interest rate expectations, added 3.6 basis points to 4.008%.

On Wall Street, the Dow Jones Industrial Average fell 0.11%, the S&P 500 lost 0.57% and the Nasdaq Composite dropped 0.92%.

The dollar extended its gains against the yen to hit 133.835, the highest since March 17, on receding expectations of a near-term tweak to Japan’s ultra-loose monetary policy.

Japan’s new central bank governor Kazuo Ueda said it was appropriate to maintain the bank’s policy for now as inflation has yet to hit 2% as a trend, suggesting he will be in no rush to dial back its massive stimulus.

The yen was last 1.26% weaker at 133.83 per dollar.

Asian shares were little changed overnight with MSCI’s broadest index of Asia-Pacific shares outside Japan slipping 0.05%.

China shares slipped, with the blue chip CSI300 Index 0.32% lower and the Shanghai Composite Index easing 0.16% amid rising geopolitical tensions around the Taiwan Strait.

China announced three days of drills on Saturday, after Taiwan’s President Tsai Ing-wen returned to Taipei following a meeting in Los Angeles with U.S. House of Representative Speaker Kevin McCarthy.

Spot gold dropped 1.1% to $1,985.94 an ounce.

U.S. crude fell 0.19% to $80.55 per barrel and Brent was at $84.88, down 0.28% on the day.

(Reporting by Ankur Banerjee; Editing by Kirsten Donovan)