By Herbert Lash
NEW YORK (Reuters) -The dollar rebounded further from last year’s sell-off and global stock markets extended a New Year slide on Wednesday as doubts about the chances of a soft landing mounted even as the Federal Reserve almost declared victory in taming inflation.
Policymakers appeared increasingly convinced last month that inflation was coming under control, but they expressed growing concern about “overly restrictive” monetary policy, minutes from the Fed’s Dec. 12-13 meeting show.
Richmond Fed President Thomas Barkin echoed similar optimism earlier in the day, saying a soft landing is “increasingly conceivable” as the Fed makes “real progress” toward subduing inflation without inflicting major damage on the jobs market.
But the minutes and Barkin’s remarks failed to shake off a dour mood in equity markets, with the major Wall Street indexes selling off after the leading German, French, Italian and Spanish stock indexes earlier closed down more than 1%.
The yield on benchmark 10-year Treasury notes briefly climbed above 4% as market optimism about deep interest rate cuts and their impact on the economy ebbed.
The recent dramatic easing in monetary policy is likely to result in a “no landing,” or continued above-trend growth that will limit how much the Fed can cut rates, said Phillip Colmar, global strategist at MRB Partners in New York.
“Fed rate cuts are not required, even if Powell & Co. are determined to provide them,” Colmar said in an email, adding that monetary and financial conditions have not been restrictive. “All major asset classes, including equities, suggest that monetary conditions are plentiful.”
MSCI’s gauge of stocks across the globe shed 0.94%, while the pan-European STOXX 600 index closed down 0.86%.
On Wall Street, the Dow Jones Industrial Average fell 0.76%, the S&P 500 lost 0.80% and the Nasdaq Composite dropped 1.18%. The market is trying to figure out if a soft landing is possible with the six rate cuts by year-end the futures market has priced in or whether that scenario will be painful, said Anthony Saglimbene, chief market strategist at Ameriprise Financial in Troy, Michigan.
“Usually when you get that type of aggressive interest rate cuts, it comes with more economic pain,” he said. “Our view is that the market has probably priced in too many rate cuts for this year.”
Fed officials in December predicted 75 basis points (bps) of rate cuts this year, driving money-market bets for around double that amount amid market optimism that spurred a year-end rally in stocks and bonds.
Resilience in the U.S. labor market has kept a recession at bay. The government is expected to report on Friday that nonfarm payrolls increased by 168,000 jobs in December, according to a Reuters survey of economists, after rising 199,000 in November.
But labor market conditions are gradually easing. U.S. job openings dropped by 62,000 to 8.79 million for the third straight month in November, the Labor Department said in its monthly Job Openings and Labor Turnover Survey, or JOLTS report.
“Today’s JOLTS data is another signal that the Fed is delivering a soft landing,” said Ron Temple, chief market strategist at Lazard, in an email.
But the report also suggests that the Fed is unlikely to cut rates as aggressively in 2024 as the market expects given the risk of reigniting inflationary pressures, he said.
Yields on government debt retreated after earlier edging higher. The yield on the 10-year Treasury note fell 3.3 basis points at 3.911%.
Germany’s 10-year Bund yield was down 1.7 basis points at 2.000%.
The dollar has gained more than 1% against major currencies this week, with the dollar index touching a fresh two-week high at 102.6 as rate-cut bets eased.
The euro fell 0.26% to $1.0919 and the yen weakened 0.89% at 143.25 per dollar.
Oil prices climbed about 3% after a disruption at Libya’s top oilfield added to fears that mounting tensions in the Middle East could disrupt global oil supplies.
Brent futures rose $2.36 to settle at $78.25 a barrel. U.S. West Texas Intermediate (WTI) crude rose $2.32 to settle at $72.70.
Gold retreated, on course for its largest percentage decline in over three weeks, after the Fed minutes flagged uncertainty about the timing of potential interest-rate cuts.
U.S. gold futures settled 1.5% lower, at $2,042.80.
Bitcoin sank roughly 5% after climbing to more than $45,000 a day earlier, its highest level since April 2022. Still, optimism about bitcoin remained high amid a possible approval this week of a spot exchange traded fund for the world’s largest cryptocurrency.
(Reporting by Herb Lash in New York, Naomi Rovnick and Dhara Ranasinghe in London and Stella Qiu in SydneyEditing by Chizu Nomiyama, David Evans and Matthew Lewis)