Global stocks retreat, Treasury yields rise as rate cut optimism fades

Global stocks retreat, Treasury yields rise as rate cut optimism fades


Global stocks retreat, Treasury yields rise as rate cut optimism fades

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NEW YORK/LONDON (Reuters) - Stocks on Wall Street and in Europe fell on Tuesday, along with prices for U.S. and other government debt, as market optimism that the Federal Reserve will cut interest rates sharply this year faded.

The dollar jumped against major currencies as the yield on the 10-year Treasury note rebounded to trade above 4% at one point.

The U.S. benchmark's yield, which moves inversely to price, last week traded as low as 3.783%, or below the 150 basis points of rate cuts the futures market had priced in by December for the Fed's overnight lending rate.

The dollar strengthened because its recent sell-off was overdone while the unemployment report for December this Friday will show a still robust U.S. labor market, said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

"When the Fed meets later this month they're going to see above-trend growth and a resilient labor market. A resilient labor market means income, which means demand, that's why the dollar is recovering," Chandler said.

A Reuters polls shows economists expect 168,000 jobs were created last month, down from 199,000 in November, and the unemployment rate will tick up to 3.8% from 3.7%.

The dollar index , a measure of the U.S. currency against six major trading partners, rose 0.779%. The euro was down 0.87% at $1.0948 and the yen rose 0.76% to 141.940.

In Europe, the pan-regional STOXX 600 index (.STOXX) lost 0.25% while MSCI's gauge of stocks across the globe (.MIWD00000PUS) shed 0.87%.

On Wall Street, the Dow Jones Industrial Average (.DJI) rose 0.07%, the S&P 500 (.SPX) lost 0.72% and the Nasdaq Composite (.IXIC) dropped 1.85%.

The three major U.S. stock indexes had notched monthly, quarterly and annual gains last Friday as traders priced in higher chances of rate cuts by the Fed this year. The benchmark S&P 500 ended last week within 1% of a record closing high reached on Jan. 3, 2022.

Futures show traders expect almost an 80% chance of a 25 basis point cut in the Fed's overnight rate when policymakers meet in March, according to the CME Group's FedWatch Tool. Traders see the Fed's target rate at 3.829% in December .

Traders are seeking clues as to whether major central banks will judge inflation has slowed enough to allow for deep rate cuts.