Dollar and stocks slide as market struggles with Fed message

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  • Investors wonder how hawkish the Fed will be in Jackson Hole
  • US new home sales plunge to 6½ year low
  • PMI data bolsters expectations of a European recession
  • Oil rebounds as Saudis talk production cuts

NEW YORK, Aug 23 (Reuters) – The dollar eased and yields initially fell on Tuesday as data showing slowing economic growth raised initial hopes that the Federal Reserve would back off from its aggressive hike in interest rates. interest rates at his central bank symposium in Jackson Hole, Wyoming on Friday.

But yields then rose and stocks fell as the view that the Fed would reiterate a hawkish message appeared to have more influence, even as market bets on the extent of the central bank’s rate hike American in September rocked all day.

Gold ended a six-game losing streak as the dollar weakened while oil rose nearly 4% after Saudi Arabia floated the idea of ​​production cuts from the of the Petroleum Exporting Countries and its allies.

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Sales of new single-family homes in the United States plunged to a 6.5-year low in July, while an S&P Global survey showed its measure of private sector business activity fell to a low. 27 months, suggesting that the Fed’s efforts to control inflation were working.

“The Fed has been pretty consistent in trying to sound as hawkish as possible,” said Marvin Loh, senior global market strategist at State Street in Boston. “Animal spirits were better for risk over the summer based on the fact that we were close to the end of the hiking cycle.”

But Goldman Sachs said in a note it expected Powell to reiterate the case for a slower pace of tightening, as noted in its July press conference and in minutes released the week last of this meeting of decision makers.

Powell is likely to balance that message by emphasizing that the Fed “remains committed to lower inflation and that future policy decisions will depend on incoming data,” Goldman said.

The U.S. economy appears poised for a winter energy price shock, with natural gas prices at their highest level since 2008, said Bill Adams, chief economist at Comerica Bank in Dallas.

With demand cooling, another big negative shock looks likely and a recession is also more likely than not by mid-2023, if not already underway, Adams said.

The Dow Jones Industrial Average (.DJI) fell 0.47%, the S&P 500 (.SPX) slipped 0.22% and the Nasdaq Composite (.IXIC) closed flat.

The dollar index fell 0.422% as the euro rebounded, rising 0.24% to $0.9965 and the 10-year Treasury yield rose 2.6 basis points to 3.061 %.

Markets are hesitant to know whether the Fed will raise rates by 50 or 75 basis points next month. The probability of a 75 basis point rise is 52.5% and the smallest rise is 47.5%, bets that reversed throughout the day.

Earlier, the euro fell to new two-decade lows after data showed eurozone business activity contracted for a second straight month in August as war in Ukraine was expected to ensure that the outlook for the European economy remains bleak.

The Chinese yuan weakened to its lowest level in two years and the pound briefly touched its lowest level since March 2020, which benefited the dollar.

While the S&P Flash Composite Purchasing Managers’ Index (PMI) of business activity in Europe was not as bad as expected, analysts said darker news for the economy is likely given how gas prices reached record highs before winter. Read more

The MSCI global equity index (.MIWD00000PUS) slid 0.26%, while the STOXX index (.STOXX) of European company stocks closed down 0.42%, after falling for nearly one week.

Benchmark gas prices in the European Union jumped 13% overnight to a record high, having doubled in just one month to be 14 times higher than the average for the past decade.

Europe has braced for further disruption of energy supplies from Russia. Read more

Euro tumbles to 20-year low against strong dollar

CHINA DISEASE

Asian stocks fell for a seventh straight session on Tuesday after Europe’s renewed energy price spike stoked recession fears and pushed bond yields higher, while sending the euro to a low level in 20 years.

Unease about China’s economy continued to seep in as a cut in lending rates and talk of a new round of official loans to property developers underscored tensions in the sector.

Chinese blue chips (.CSI300) fell 0.5% as the yuan fell to a near two-year low.

The Nikkei (.N225) lost 1.2% after a PMI survey showed factory activity in Japan slowed to a 19-month low in August. Read more

Crude prices rose as Saudi Arabia warned that the OPEC+ producer alliance could cut output.

U.S. crude futures rose $3.38 to settle at $93.74 a barrel and Brent rose $3.74 at $100.22.

US gold futures rose 0.7% to $1,761.20.

Relapse of American assets
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Reporting by Herbert Lash, additional reporting by Huw Jones, Ashitha Shivaprasad and Wayne Cole; Editing by Mike Harrison, Chizu Nomiyama, Josie Kao and Alison Williams

Our standards: The Thomson Reuters Trust Principles.

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