Stocks continue decline amid weaker rate-cut expectations

Data continue to suggest the Fed and others will be reluctant to cut.

Global stocks retreated and Treasury yields held near four-month highs as solid economic readings and higher commodities prices reinforced the view that interest rates will remain higher for longer.

Those concerns have kept global equities from extending the previous quarter’s strong gains. The Stoxx 600 slid 0.1%, while futures pointed to further declines at the US open. Treasury 10-year yields rose three basis points to around 4.38%, up almost 20 basis points from last week’s close as traders pared expectations for the timing and scope of US rate cuts this year.

Adding to the inflation fears, Taiwan’s strongest earthquake in 25 years cast uncertainty over chip production, as the world’s largest chipmaker, Taiwan Semiconductor Manufacturing Co. evacuated factory areas. Shares in the firm slipped 1.5%, while Asian bourses lost ground.

The spotlight Wednesday will be firmly on Federal Reserve Chair Jerome Powell, who last week said the central bank is awaiting more evidence that inflation is in check. A strong monthly US jobs print on Friday, coming on top of a robust reading on US manufacturing, could further dent policy-easing expectations.

“We expect the cautious risk environment to persist into this Friday’s US non-farm payroll data release as the ‘good news is bad news’ mantra continues to play out,” said Jun Rong Yeap, strategist at IG Asia Pte. “The data will play a key role in further moving the dial around market rate views.”

Swap traders currently price less than three Fed rate cuts in 2024, with a high chance that policy easing is delayed beyond June. That’s despite comments Tuesday from San Francisco President Mary Daly and the Cleveland Fed’s Loretta Mester, who threw their weight behind three cuts this year.

Rising commodity prices meanwhile are also fanning inflation expectations, with Brent crude futures staying just off $89 a barrel after closing at the highest level since October on Tuesday. Copper advanced for a third day, while palm oil is at the highest since November 2022, raising the risk of higher global food inflation.

An index of the dollar was little changed. The yen was also flat against the greenback at around 151 per dollar, remaining around the weakest level of the year — keeping alive the possibility of official intervention to support the currency.

Key events this week:

Eurozone CPI, unemployment, Wednesday
US ADP employment, ISM Services, Wednesday
Fed Chair Jerome Powell speaks, Wednesday
Fed’s Austan Goolsbee, Adriana Kugler and Michelle Bowman also speak, Wednesday
Eurozone S&P Global Services PMI, PPI, Thursday
US initial jobless claims, Challenger job cuts, Thursday
Fed’s Loretta Mester, Alberto Musalem, Thomas Barkin, Patrick Harker, Austan Goolsbee speak, Thursday
European Central Bank publishes account of March rate decision, Thursday
Eurozone retail sales, Friday
US unemployment, nonfarm payrolls, Friday
Fed’s Michelle Bowman, Thomas Barkin and Lorie Logan speak, Friday