S&P 500 ekes out gain, Treasury yields turn higher on eve of Powell testimony

NEW YORK, March 6 (Reuters) – The S&P 500 closed slightly higher and Treasury yields reversed at the end of a seesaw session on Monday as investors looked ahead to US Federal Reserve Chairman Jerome Powell’s congressional testimony and crucial jobs data later in the week.

All three major U.S. stock indexes were essentially unchanged on the day, ending well below session highs, while Treasury yields reversed an earlier dip and the dollar pared its losses in afternoon trading.

“You’re going to have market reactions like this, where investors take advantage of an early rally ahead of some potentially market-moving events,” said Chuck Carlson, chief executive officer at Horizon Investment Services in Hammond, Indiana. “It’s indicative of a market that’s playing it close to the vest.”

“It’s trendless in anticipation,” Carlson added.

While economic data showed a decrease in U.S. factory orders due to falling aircraft orders, the report otherwise hinted that the manufacturing sector could be stabilizing.

On Tuesday and Wednesday, Fed Chairman Jerome Powell is due to deliver his semi-annual testimony before Congress, which will be closely parsed for any clues regarding the extent and duration of the U.S. central bank’s restrictive monetary policy aimed at curbing inflation.

The Labor Department’s much-anticipated February employment report is expected on Friday. Any signs of softening in the robust jobs market will be seen as a sign that the Fed’s hawkish tactics are having their desired effect.

The Dow Jones Industrial Average rose 40.47 points, or 0.12%, to 33,431.44, the S&P 500 gained 2.78 points, or 0.07%, to 4,048.42 and the Nasdaq Composite dropped 13.27 points, or 0.11%, to 11,675.74.

European shares reversed an earlier advance to close essentially unchanged after European Central Bank officials hinted at more interest rate increases, following softer-than-expected euro zone retail sales.

The pan-European STOXX 600 index lost 0.02% and MSCI’s gauge of stocks across the globe gained 0.27%.

Emerging market stocks rose 0.58%. MSCI’s broadest index of Asia-Pacific shares outside Japan closed 0.49% higher, while Japan’s Nikkei rose 1.11%.

Benchmark US Treasury yields ended higher on the day, bouncing back from initial decline.

Benchmark 10-year notes last fell 2/32 in price to yield 3.9714%, from 3.963% late on Friday.

The 30-year bond last fell 10/32 in price to yield 3.9051%, from 3.887% late on Friday.

The dollar lost ground against a basket of world currencies ahead of Powell’s testimony. The dollar index fell 0.18%, with the euro up 0.4% to USD 1.0677.

The Japanese yen weakened 0.05% versus the greenback at 135.97 per dollar, while sterling was last trading at USD 1.2018, down 0.18% on the day.

Crude prices rebounded to modest gains after a debate over supply tightness by oil company executives offset worries over softening supply following China’s low-end growth projections.

US crude rose 0.98% to settle at USD 80.46 per barrel and Brent settled at USD 86.18 up 0.41% on the day.

Gold consolidated recent gains. Spot gold dropped 0.5% to USD 1,846.34 an ounce.

(Reporting by Stephen Culp; Additional reporting by Yoruk Bahceli and Wayne Cole; Editing by Shounak Dasgupta, Will Dunham and Nick Zieminski)

Euro zone bond yields drop ahead of Fed Powell testimony

March 6 (Reuters) – Euro zone government bond yields fell on Monday as market focus shifted to the US ahead of Federal Reserve Chair Jerome Powell’s testimony on Tuesday and job data on Friday.

China set a modest target for growth this year, triggering expectations for a possible adverse impact on the bloc’s economy and reviving some hopes about a potential slowdown in the pace of European Central Bank rate hikes.

Italy’s 10-year bond yield fell as much as 10.5 bps to 4.44%, with the spread between Italian and German 10-year yields tightening to 177 bps.

Germany’s 10-year yield dropped 6 bps to 2.656%.

(Reporting by Stefano Rebaudo; Editing by Amanda Cooper)

Decisions after March rates hike must be based on data – ECB’s Centeno

MILAN, March 6 (Reuters) – Policy decisions after an increasingly likely 50 basis point (bps) hike in interest rates expected later this month must be based on data, European Central Bank (ECB) Governing Council member Mario Centeno was quoted as saying on Monday.

“We need to look very carefully at what the March forecast will be. This is the most important data we will have to guide our future decisions,” Centeno told daily La Stampa.

On Sunday, ECB President Christine Lagarde said that underlying inflation in the euro zone would stay high in the near term, making a 50 bp hike later this month increasingly certain.

The ECB has already raised rates by 3 percentage points since July and essentially promised another half a percentage point increase on March 16.

“If you ask me what will happen after March, I think it is important to take seriously the estimates that we will have in a few days,” Centeno noted, adding that the process of raising the main interest had been too fast.

“This has never happened before, it has never gone so fast. We need some patience to allow these 300 basis points of increase to have an impact on inflation, because that is our main goal,” he said.

(Reporting by Federico Maccioni, editing by Cristina Carlevaro, Kirsten Donovan)

Japan’s Nikkei scales 3-month peak on Wall Street’s lead; tech paces gains

TOKYO, March 6 (Reuters) – Japan’s Nikkei share average rallied more than 1% on Monday to hit a three-month high, tracking gains on Wall Street in the previous session after US Federal Reserve officials calmed fears of policy overtightening.

Rate-sensitive tech shares outperformed in Japan, just like in the US, after comments from Richard Fed President Thomas Barkin that inflation is “likely past peak,” which helped to rein in long-term Treasury yields from multi-month highs. A day earlier, Atlanta Fed chief Raphael Bostic hinted that a peak in rates may come in summer.

Chipmaking equipment giant Tokyo Electron was the Nikkei’s biggest support, providing 50 of the index’s 310-point surge with its 3.1% advance. Sony also stood out with a 2.56% jump.

Startup investor SoftBank Group climbed 2.74%, getting additional momentum from news that its subsidiary Arm Ltd aims to raise at least USD 8 billion from a U.S. listing.

The Nikkei rose 1.11% to end at 28,237.78. The index had opened above the key psychological 28,000 mark and then probed as high as 28,288.62 for the first time since December 1 earlier.

Of the Nikkei’s 225 components, 161 rose, 59 fell and five were flat.

The broader Topix gained 0.84% to 2,036.49.

Further gains for Japanese stocks this week could be hard with Fed Chair Jerome Powell giving testimony to Congress on Tuesday and Wednesday, followed by Bank of Japan Governor Haruhiko Kuroda’s final policy meeting running the following two days.

The pivotal US non-farm payrolls report is also due on Friday, which will be the final day for Fed speak before the black out period going into a policy meeting on March 22.

“The topside must be starting to get heavy considering we also had a more than 400-point rally on Friday” in the Nikkei, Nomura Securities strategist Maki Sawada said.

“The recovery to back above 28,000 happened really suddenly.”

(Reporting by Kevin Buckland; Editing by Rashmi Aich)

Oil edges higher on supply tightness, China demand hopes

HOUSTON, March 6 (Reuters) – Oil prices edged slightly higher on Monday, bouncing back from early losses, as top oil executives at an energy conference in Houston discussed supply tightness and hopes for rising Chinese demand.

Oil market and logistics are tight and vulnerable to any unexpected supply disruption, as Russian oil is still getting to the market, but at different costs, oil major Chevron Corp CVX.N Chief Executive Mike Wirth said at the CERAWeek energy conference.

Trading company Gunvor’s CEO Torbjorn Tornqvist said crude prices may rise in the second half of the year as Chinese demand returns to the market, adding that the oil market has stabilized.

Brent crude futures LCOc1 were trading up 35 cents, or 0.4% at $86.18 a barrel, while U.S. West Texas Intermediate (WTI) crude CLc1 futures were up 78 cents, or 1%, at $80.46.

Oil was also supported by top crude exporter Saudi Arabia raising prices for the flagship Arab light crude it sells to Asia for a second month in April, as well as a weaker dollar.

A weaker greenback makes dollar-denominated crude cheaper for foreign buyers and boosts demand.

Earlier in the session, both benchmarks had decline by more than $1 per barrel after China on Sunday set a lower-than-expected 5% gross domestic product (GDP) growth target for this year, down from last year’s 5.5% target. Policy sources had told Reuters the target could be set as high as 6% for 2023.

China’s GDP grew last year by only 3%. Premier Li Keqiang on Sunday said the foundation for stable growth needed to be consolidated, that insufficient demand remained a pronounced problem and expectations of private investors and businesses were unstable.

Oil traders are also concerned about interest rates across the world as global central banks have been tighteneing policy to fight inflation.

Investors awaited U.S. Federal Reserve Chair Jerome Powell’s testimony this week. Traders have started factoring in rate hikes but are hoping for smaller increases than last year.

The Fed’s Powell will testify to Congress on Tuesday and Wednesday, when he is likely to be quizzed on whether larger increases are needed in the world’s biggest oil-consuming country.

Future U.S. rate hikes are also likely to depend on what the February payrolls report reveals on Friday, followed by the February inflation report next week.

Over the weekend, European Central Bank President Christine Lagarde said it was “very likely” the bank would raise interest rates this month to keep a lid on inflation.

(Reporting by Arathy Somasekhar in Houston, Additional reporting by Noah Browning in London, Mohi Narayan in New Delhi and Sudarshan Varadhan in Singapore; Editing by David Goodman, Marguerita Choy and David Gregorio)

Gold prices ease as traders fret about interest rates

March 6 (Reuters) – Gold prices ticked lower on Monday as central banks indicated further interest rate hikes to tame stubbornly high inflation, diminishing the metal’s appeal.

Spot gold was down 0.1% at USD 1,853.92 per ounce, as of 0708 GMT, after climbing to its highest since February 15 earlier in the session. US gold futures rose 0.3% to USD 1,859.60.

Higher interest rates discourage investors from placing money in non-yielding assets such as gold.

“More sustained moves (in gold) may be driven by hard data – US non-farm payroll, where a weaker-than-expected figure will be looked upon to push back against January’s strong labour data as a one-off,” said Yeap Jun Rong, a market analyst at IG.

Investors are awaiting US Federal Reserve Chair Jerome Powell’s testimony to Congress on Tuesday and Wednesday, and the February payrolls report on Friday for monetary policy clues.

San Francisco Fed President Mary Daly said on Saturday if data on inflation and the labour market continued to come in hotter than expected, interest rates would need to go higher, and stay there longer. Richmond Fed President Thomas Barkin said on Friday he could see US rates in the 5.5%-5.75% range.

Data on Friday showed the US services sector grew at a steady clip in February, with new orders and employment rising to more than one-year highs.

“We see a trading range of USD 1,775-USD 1,900 as we expect to see the March Federal Open Market Committee meeting to come across as more hawkish than investors are hoping for,” Edward Meir, a metals analyst at Marex, wrote in a monthly note.

Underlying inflation in the euro zone will stay high in the near term, so a 50 basis-point rate increase later this month is increasingly certain, European Central Bank President Christine Lagarde said.

Spot silver was down 0.1% at USD 21.22 per ounce, platinum slipped 0.4% to USD 973.66 and palladium lost 0.7% to USD 1,443.04.

(Reporting by Kavya Guduru in Bengaluru; Editing by Subhranshu Sahu and Sherry Jacob-Phillips)

US yields slip after recent jump on strong data

NEW YORK, March 3 (Reuters) – Treasury yields slipped on Friday after hitting new highs this week as they met resistance following comments a day earlier from Federal Reserve officials that temporarily calmed fears around the direction of inflation and interest rates.

US government bond yields, which rise when prices fall, surged this week as strong US economic data and rising prices in Europe renewed concerns that central banks will need to raise rates more than expected to cool the economy and tame inflation.

Benchmark 10-year Treasury yields, as well as 30-year yields, rose above 4% for the first time since November, while yields on two-year notes hit levels not seen since 2007.

“Today is really about trading. The 10-year rose so much over the prior three to four days, most desks I talked to were short going into the weekend,” said Stan Shipley, strategist at Evercore SI in New York.

“They covered their shorts and got somewhat into a neutral position,” he said.

Bond bears met some resistance after Fed officials on Thursday expressed doubt on whether recent hotter-than-expected data was a “blip” or a sign that higher interest rates were required to slow price rises.

The market is trying to gauge how the Fed’s narrative of rates likely staying higher-for-longer will impact the US central bank’s economic projections.

Data on Friday showed the US services sector grew at a steady clip in February, with new orders and employment rising to more than one-year highs, suggesting the economy continued to expand in the first quarter.

The data is second-tier and had little impact on the Treasury market, Shipley said.

The yield on 10-year notes slid 10.6 basis points to 3.967%, while two-year yields, which are sensitive to interest rate expectations, fell 4.1 basis points to 4.863%.

The gap between two- and 10-year yields, seen as a recession harbinger when the shorter-dated notes are higher than the longer end, remained inverted at -89.8 basis points.

Money market expectations that the Fed may go back to a 50 basis-point hike in its policy rate at the end of a two-day meeting on March 22 gained traction earlier this week, though the consensus remained largely around a hike of 25 basis points.

US unemployment data on March 10 and the Consumer Price Index on March 14 will help determine the Fed’s next steps as it seeks to slow inflation to its 2% target. Fed Chair Jerome Powell’s testimony to Congress next week could also give some indications on the monetary policy outlook.

(Reporting by Davide Barbuscia and Herbert Lash in New York; Editing by Elaine Hardcastle and Matthew Lewis)

Gold set for first weekly rise in five on dollar weakness

March 3 (Reuters) – Gold prices climbed to a two-week high on Friday and were heading for their first weekly rise in five as a pullback in the US dollar and Treasury yields offered some respite from prospects of more rate hikes from the Federal Reserve.

Spot gold was up 0.8% at USD 1,850 per ounce by 02:28 p.m. ET (1928 GMT), its highest since Feb. 15. Prices have risen about 2.2% so far this week.

US gold futures settled 0.8% higher at USD 1,854.60.

Until a new catalyst is found, such as next week’s jobs or consumer prices data, gold is likely to remain range-bound between the USD 1,830-USD 1,850 levels, Bart Melek, head of commodity markets strategy at TD Securities, said.

With China recovering, there may be continued robustness in gold consumption, with people also buying the metal to hedge against inflation, Melek added.

The US dollar index was headed for its first weekly loss in five, making bullion more attractive for other currency holders, while benchmark US 10-year yields crept lower from near a four-month peak.

While Fed Governor Christopher Waller said strong economic data could see rates above the 5.1%-5.4% range, Atlanta Fed President Raphael Bostic said he favoured a “slow and steady” increase moving forward and a pause by mid or late summer.

Traders are now pricing in at least three more 25 basis point rate hikes this year, with rates peaking at 5.43% by September.

Despite gold being often seen as an inflation hedge, rising interest rates increase the opportunity cost of holding zero-yielding bullion.

Should support for gold at USD 1,780-USD 1,800 break over the next few weeks, it could be due to a more hawkish shift in US monetary policy, Craig Erlam, senior market analyst at OANDA, wrote in a note.

Spot silver gained 1.3% to USD 21.15 per ounce and was set for its biggest weekly increase since January. Platinum jumped 1.6% to USD 976.98, while palladium rose 0.2% to USD 1,452.20.

(Reporting by Seher Dareen in Bengaluru; Editing by Jan Harvey and Krishna Chandra Eluri)

Sharp drop in equity premium may mark return of 60/40 portfolio

March 3 (Reuters) – The reward for holding US stocks over Treasury bonds has not been this unattractive since 2004, possibly setting the stage for the sought-after 60/40 portfolio diversification to make a comeback after one of its worst years on record.

A 60/40 portfolio, which typically has 60% of its holdings in stocks and the remaining 40% in fixed income, counts on moves in the two asset classes to offset one another, with stocks strengthening amid economic optimism and bonds rising during turbulent times.

The strategy took a backseat in 2022 as the Federal Reserve raised interest rates aggressively to rein in inflation. However, signals from the stock and bond markets this year are pointing to a return of the popular asset allocation strategy.

At the end of February, the S&P 500 returned 5.41% in earnings yield, the reciprocal of price-to-earnings ratio, while the yield on the benchmark US 10-year bond surged to 3.94%, according to data from Refinitiv. The 1.47 percentage-point difference is the lowest upside stocks have held over bonds in nearly two decades.

Earnings yield here refers to the S&P 500 earnings per share estimate for the next 12 moths divided by the index price.

“The relative shine of equities is definitely dulled by rising yields across the Treasury curve,” said Eric Leve, chief investment officer of wealth and investment management firm Bailard.

With estimates for earnings in 2023 implying essentially no growth over 2022, rates above 5% on short-term bonds and 10-year yields on the verge of 4% represent credible alternatives to stocks, according to Leve.

The thinning spread between returns from stocks and bonds is set to bring the 60/40 portfolio strategy back in favor.

“This strategy does provide excellent hedging in current environment,” said Glenn Yin, Head of Research and Analysis at AETOS Capital Group.

The 60/40 portfolio has already had the best start to the year since 1991, according to Bank of America.

The Fed’s move to tighten monetary policy at the fastest pace in decades pumped up bond yields after nearly two years of near-zero interest rates.

But a rise in yields poses headwinds for equities, especially growth stocks, and by extension, a large index like the S&P 500. Apple (AAPL), Alphabet (GOOGL) and Amazon.com Inc (AMZN) are among the tech heavyweights that make up nearly a fifth of the index and bore the brunt of a sell-off last year.

“Equity yields will continue to struggle this year as both prices and earnings decline” amid an economic slowdown, said Lance Roberts, Chief Investment Strategist at RIA Advisors.

On the other hand, “during a recession, yields will fall and Treasury bond prices will rise,” said Roberts. He prefers bonds over stocks today, he added.

Recent results and guidance from companies have bolstered the case for investors who believe the stock market’s early-year rally is unlikely to last.

As of Feb. 24, results from 465 of the S&P 500 companies showed fourth-quarter earnings are estimated to have fallen 3.2% from the year-ago quarter while Wall Street’s expectation for S&P earnings growth for 2023 fell to 1.7% from an expected 4.4% on Jan. 1, according to Refinitiv.

Expectations for US earnings to decline in the first two quarters if the year come amid weaker-than-expected fourth-quarter results for 2022, which Credit Suisse estimates will be the worst earnings season outside of a recession in 24 years.

Investors are hoping that in case of a severe recession, the Fed would be forced to slash interest rates. While the economic downturn would hit stock returns, drop in bond yields should provide some relief in such a scenario, according to analysts.

“For me, the best risk-reward portfolio in this environment for now is long duration Treasury bonds, and deep value, dividend equities,” Roberts said. Deep value refers to stocks that are trading at a huge discount to their intrinsic values.

“When the recession arrives, and the Fed cuts rates to zero, I will sell my bond portfolio to lock in the capital appreciation and buy distressed equities with high yields and companies with strong balance sheets and earnings growth,” he added.

(Reporting by Mehnaz Yasmin in Bengaluru; Editing by Alden Bentley and Saumyadeb Chakrabarty)

Japan’s 10-year bond yield crosses BOJ policy cap

TOKYO, March 3 (Reuters) – Japan’s 10-year government bond yield breached the Bank of Japan’s (BOJ) policy ceiling for the first time in a week on Friday in the run-up to the central bank’s policy meeting next week.

The 10-year government bond yield rose 0.5 basis points (bps) to 0.505%, crossing the BOJ’s policy ceiling for the first time since February 22. It last traded at 0.500%.

“Investors wanted to reduce their positions in 10-year bonds as they are cautious about a surprise tweak in the BOJ policy at the meeting,” said Ataru Okumura, strategist at SMBC Nikko Securities.

The BOJ will hold its two-day policy meeting starting Thursday, which will be the last one for BOJ Governor Haruhiko Kuroda whose second five-year term ends in April.

In the previous session, investors sold more than 1.7 trillion yen (USD 12.46 billion) worth of 10-year bonds at the BOJ’s daily operation of fixed-rate, unlimited amounts of bond buying. On the same day, the finance ministry held an auction for 10-year bonds.

“Some bought 10-year bonds at the auction and sold them to BOJ immediately,” said Okumura.

Elevated US yields added pressure to Japanese peers.

Overnight US Treasury yields continued to climb after strong labor data reinforced concerns that the US Federal Reserve will need to raise interest rates further to cool the economy.

Benchmark 10-year JGB futures rose 0.26 yen to 146.89, as current futures contract matures on March 13.

The two-year JGB yield fell 0.5 bp to -0.045%, while the five-year yield was flat at 0.195%.

Yields on super-long notes rose after hitting multi-months low this week, with the 20-year JGB yield rising 1.5 bps to 1.225% and the 30-year JGB yield rising 2.5 bps to 1.410%.

The 40-year JGB yield rose 4.5 bps to 1.605%.

(Reporting by Junko Fujita; Editing by Nivedita Bhattacharjee)

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