© Reuters. FILE PHOTO: A passerby walks past an electric monitor displaying the graph of recent movements on Japanese yen exchange rate against the U.S. dollar in Tokyo, Japan, October 20, 2022. REUTERS/Issei Kato/
By Herbert Lash and Amanda Cooper
NEW YORK/LONDON (Reuters) -Global stocks slid from two-month highs and the safe-haven dollar steadied on Wednesday after stronger-than-expected U.S. retail sales clouded the inflation outlook and hopes that the Federal Reserve could ease its aggressive interest rate hikes.
Stocks in Europe pared overnight losses in Asia after Poland’s president said a missile that hit his country was probably a stray Ukrainian defense projectile, dispelling fears that it came from Russia.
U.S. equities were hurt by a dire holiday sales outlook from Target Corp (NYSE:) as investors took the opportunity after the recent softer inflation data to book profits given the vulnerability of the economic backdrop in Europe and China.
But better-than-expected U.S. retail sales last month could help underpin the American economy in coming months and force the Fed to retain its aggressive rate posture despite cooler than expected inflation data this week and last.
“The softer inflation data took some wind out of the dollar’s sails,” said Joe Manimbo, senior market analyst at Convera in Washington.
“The dollar is steadier because we’re having this residual, geopolitical skittishness as well as signs of a fairly sturdy U.S. economic backbone in the forms of U.S. retail sales.”
Retail sales rose 1.3% in October, more than the 1.0% increase that economists polled by Reuters had forecast.
The dollar briefly pared losses on release of the retail sales data, but later fell against the euro to trade little changed against major currencies.
The euro rose 0.37% to $1.0386, while the yen weakened 0.07% versus the dollar at 139.40.
The initial reaction to the news of a missile striking Poland was understandable but dissipated as “it soon became apparent that this was highly unlikely to be a direct attack,” said Deutsche Bank (ETR:) strategist Jim Reid.
Shares in Europe fell, with the falling 1.0% to snap a four-day winning streak. The auto sector was hit by a report that Germany’s Mercedes Benz cut its China electric vehicle prices as sales lagged. It’s shares fell 6.2%.
MSCI’s all-country world index fell 0.71%, just off a two-month high set on Tuesday.
On Wall Street, the rose 0.02%, the lost 0.66% and the dropped 1.35%.
Long-dated Treasury yields fell and the inversion in key parts of the yield curve deepened after the strong retail sales report boosted expectations that the Fed will continue hiking rates, and in turn is more likely to hurt economic growth.
Goldman Sachs (NYSE:) said it was adding another 25 basis point hike by the Fed to its 2023 outlook, and raised its forecast for the peak fed funds rate to 5.0%-5.25% – higher than the market’s current pricing of a peak target rate of 4.92%.
Goldman said it sees risks to its forecast tilted to the upside due to the possible need for more rate hikes to keep growth below potential, inflation will likely remain too high and policymakers may have to counter any premature easing.
Yields fell further on the market’s benign inflation outlook. The yield on slid 10.5 basis points to 3.694%.
The gap between yields on two- and 10-year notes, seen as a recession harbinger, deepened to -67.4 basis points.
“We still see the Fed on an aggressive path of raising rates to bring down inflation, which is still running way too hot,” Manimbo said.
Oil prices fell more than 1% as Russian oil shipments via the Druzhba pipeline to Hungary restarted and rising COVID-19 cases in China weighed on sentiment.
slid $1.33 to settle at $85.59 barrel, while settled down $1.00 at $92.86.
U.S. settled down about 0.1% to $1,775.80 an ounce.
last fell 1.99% to $16,539.00.
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