Wall St ends lower, Treasury yields gain as strong data cools rate-cut hopes

By Stephen Culp

NEW YORK (Reuters) -U.S. stocks followed their European counterparts to a lower close on Wednesday and U.S. Treasury yields resumed their uphill climb as robust economic data chilled bets that the Federal Reserve could begin reducing its policy rate as early as March.

All three major U.S. indexes finished the session lower, with interest rate-sensitive momentum stocks weighing heaviest on the tech-heavy Nasdaq.

The prospect of forestalled rate cuts helped U.S. Treasury yields build on recent gains.

The Commerce Department’s December retail sales report painted a portrait of a healthy consumer – responsible for about 70% of the U.S. economy – who has been able to weather the dual storms of hot inflation and restrictive monetary policy.

“We had news that the U.S. consumer continues to be quite healthy, but that has increased anxiety that the Fed’s first rate cut could potentially be pushed to May from March,” said Ryan Detrick, chief market strategist at Carson Group in Omaha, Nebraska. “Yields are moving higher on the strong retail sales numbers as well, adding to near-term worries.”

At last glance, financial markets are pricing in a 53.8% probability of the Fed cutting its key policy rate by 25 basis points in March, down from 63.l% on Tuesday, according to CME’s FedWatch tool.

The Dow Jones Industrial Average fell 94.45 points, or 0.25%, to 37,266.67, the S&P 500 lost 26.77 points, or 0.56%, to 4,739.21 and the Nasdaq Composite dropped 88.73 points, or 0.59%, to 14,855.62.

European shares ended sharply lower, sliding 1.1% as hawkish commentary from European Central Bank (ECB) officials dampened rate cut hopes and underwhelming economic data from China curbed investor risk appetite.

“When the second-largest economy in the world disappoints again on GDP growth that only adds to the global jitters,” Detrick added. “The weakness in China potentially spills over more into Europe than it does to the United States.”

The pan-European STOXX 600 index lost 1.13% and MSCI’s gauge of stocks across the globe shed 0.88%.

Emerging market stocks lost 2.13%. MSCI’s broadest index of Asia-Pacific shares outside Japan closed 2.24% lower, while Japan’s Nikkei lost 0.40%.

U.S. Treasury yields were pressured higher by the surprisingly strong retail sales print combined with an unexpected rise in UK inflation.

Benchmark 10-year notes last fell 9/32 in price to yield 4.1%, from 4.066% late on Tuesday.

The 30-year bond last fell 5/32 in price to yield 4.3125%, from 4.305% late on Tuesday.

The dollar advanced, touching a fresh one-month high against a basket of world currencies after the solid retail sales report suggested U.S. economic resilience, reining in hopes of an interest rate reduction in March.

Soft economic data from China also supported the safe haven currency.

The dollar index rose 0.03%, with the euro up 0.06% to $1.088.

The Japanese yen weakened 0.65% versus the greenback at 148.19 per dollar, while sterling was last trading at $1.2681, up 0.36% on the day.

U.S. crude prices reversed course to settle higher after supply jitters arising from simmering tensions in the Middle East offset softened demand worries on the heels of China’s shakier-than-expected GDP report.

U.S. crude oil rose 0.22% to settle at $72.56 per barrel, while Brent settled at $77.88 per barrel, down 0.52% on the day.

Gold prices plunged to a more than one-month low on waning expectations of a March interest rate cut.

Spot gold dropped 1.1% to $2,005.70 an ounce.

(Reporting by Stephen Culp in New YorkAdditional reporting by Dhara Ranasinghe in London and Ankur Banerjee in SingaporeEditing by Marguerita Choy, Nick Zieminski and Matthew Lewis)