Wall Street Stocks Pause as Treasury Yields Hit New Highs

By Lawrence Delevingne

(Reuters) -Shares on Wall Street took a breather on Friday after a tech-driven rally and U.S. Treasury yields rose to fresh heights as markets evaluated a world of elevated interest rates and effects of Russia’s war in Ukraine.

The Nasdaq fell about 0.35% as a rally in technology stocks lost steam, while the Dow Jones Industrial Average and S&P 500 inched up about 0.25%, with financial shares rising on growing bets of bigger interest rate hikes by the Federal Reserve.

MSCI’s gauge of stocks across the globe was down 0.2%, but is likely to notch a second consecutive week of gains for the first time in 2022. The pan-European STOXX 600 index inched up 0.11%, but was down on the week.

Share prices have been supported by global flash Purchasing Managers’ Index (PMI) data for March this week showing the world economy was broadly resilient, but the longer term economic outlook is making investors cautious. Barclays, for example, cut its 2022 world economic growth forecast this week to 3.3% while traders have ramped up short bets.

Global bond markets were still in the grips of one of their worst sell-offs in recent memory.

Yields on benchmark 2- and 10-year U.S. Treasury notes jumped to almost three-year highs on Friday as the market anticipates inflation will spiral higher and mulls how aggressive the Federal Reserve will be as it tightens policy.

Ten-year Treasury yields rose 14 basis points to 2.482%, a rate last seen in early May 2019. The 2-year yield, which typically moves in step with interest rate expectations, was up 17 basis points at 2.295% – a rate also last seen in early May 2019.

Chicago Fed President Charles Evans was the latest U.S. policymaker to sound more hawkish, saying on Thursday the Fed needs to raise interest rates “in a timely fashion” this year and in 2023 to curb high inflation before it is embedded in U.S. psychology and becomes even harder to get rid of.

Bank of America (BofA) joined a small but growing number of top investment banks calling for more aggressive interest rate increases from the U.S. Federal Reserve against a backdrop of soaring inflation data. The bank now expects two hikes of 50 bps each at its June and July meetings with “risks” of those expectations being pulled forward into May and June respectively.

Markets expect U.S. interest rates to rise by as much as 190 basis points in total over the rest of this year, after a 25 bps hike last week. Investors are assigning an approximately 77% probability of a 50 bps rate hike in March.

Morgan Stanley market analysts wrote in a note late Thursday that fast Fed action was not overly concerning for the economy.

“While a disorderly tightening of financial conditions remains a risk to the outlook, particularly in areas like credit, our baseline growth outlook remains constructive,” they wrote. “We think (it) helps contain risks that financial conditions become too dislocated in response to the Fed’s actions.”

OIL REVERSAL

Oil prices turned positive on Friday after reports of a missile strike and a fire at Saudi Arabia’s state-run oil company Aramco’s facility.

U.S. crude rose 0.74% to $113.17 per barrel and Brent was at $119.65, up 0.52% after dropping more than $3 earlier in the session. Both benchmarks were heading for their first weekly gains in three weeks. [O/R]

The broader dollar index was virtually flat but on track for a small weekly gain. The euro edged lower.

“Everything in these commodity markets, everything is done in dollars so as we see a little bit of a pullback here in commodity prices, that is going to coincide with a little bit of softness for the dollar,” said Edward Moya, senior market analyst, at Oanda in New York. “Until we have a major geopolitical development you are probably going to see just choppiness from here on out.”

Demand for safe-haven assets including gold and the Swiss franc remained resilient as the conflict in Ukraine continued. Moscow on Friday signalled scaling back its ambitions in Ukraine to focus on territory claimed by Russian-backed separatists as Ukrainian forces went on the offensive, recapturing land on the outskirts of the capital Kyiv.

Spot gold remained elevated at $1,953 an ounce, down about 0.23% on the day [GOLD/]

(Reporting by Lawrence Delevingne in Boston and Saikat Chatterjee in London, additional reporting by Chuck Mikolajczak in New York; Editing by Richard Chang and Susan Fenton)