U.S. stocks retreated and the Treasury yield curve flattened to the narrowest since 2007 amid growing speculation that the Federal Reserve views economic growth as being firm enough to justify raising interest rates as soon as June.
The S&P 500 Index erased Monday’s rally amid data indicating gains in consumer prices, with losses accelerating after a pair of Fed officials suggested higher rates may be warranted. Two-year Treasuries, the coupon security most sensitive to expectations around Fed policy, underperformed longer maturities, shrinking the yield advantage offered on 10-year debt. Petroleo Brasileiro SA, Brazil’s state-run oil producer, is offering record-high rates to entice investors to its first international bond sale in a year.
Global equities have struggled to extend gains since reaching a four-month high on April 20 as investors scrutinize U.S. data for clues to the timing of the Fed’s next policy move. Reports Tuesday showed inflation and new-home construction increased, a day after readings on manufacturing disappointed traders. There is scant evidence that unprecedented stimulus from Japan to Europe has invigorated growth prospects in those economies, adding to concern that tightening in America could stifle global expansion.
“It seems the Fed speak is spooking equities,” Yousef Abbasi, global market strategist at JonesTrading Institutional Services LLC in New York, said by phone. “People were chasing the market after yesterday and when the Fed talk started to hit the tape they took their feet off the gas pedal and that’s created a bit of a vacuum. You had three Fed officials today say we could see rate hikes in the near future and that potential for higher rates also impacts the utilities and staples sectors.”
On Tuesday, Atlanta Fed President Dennis Lockhart and San Francisco’s John Williams said two rate increases this year may be warranted, while Dallas Fed President Robert Kaplan said a hike may come soon. Futures traders pushed the odds for an increase in June to 14 percent, from 4 percent on Monday.
“Currently my assumption is two, possibly three,” Lockhart said in Washington. He was joined at the Politico-hosted event by Williams, who said “gradual means two to three rate increases this year.”
The S&P 500 fell 0.9 percent to 2,047.21 as of 4 p.m. in New York, after a 1 percent rally yesterday, while the Dow Jones Industrial Average slipped 1 percent, shedding 181 points. Following a 15 percent rally from a February low to the four-month high on April 20, the S&P 500 has failed to maintain momentum amid mixed corporate earnings and signs of a lukewarm pickup in the economy. It’s fallen 2.6 percent since then.
Consumer-staples companies plunged, with Kraft Heinz Co. posting its steepest decline in six months. After below-estimate earnings from Macy’s Inc. sent chain-store shares tumbling last week, Home Depot Inc. slumped Tuesday as executives said same-store sales growth shrank as the first quarter progressed. Utility shares also tumbled as rising Treasury yields made their dividends less attractive.
“Defensive sectors are leading us lower,” said Michael Antonelli, an institutional equity sales trader and managing director at Robert W. Baird & Co. in Milwaukee. “People are rotating out of safety. This selling seems to be kind-of a broad-based ‘sell the winners’ type of selloff.”
Turbulence is back in a market that before last week had seen only one drop of comparable size since February and where conventional measures of volatility have been stuck below historical averages. Tuesday’s cocktail of improving economic data and Fed hawkishness proved particularly hard to swallow.
Minutes from the Fed’s April meeting, when rates were left on hold, are due Wednesday. Traders are pricing in only a 6 percent chance policy makers will increase rates in June, with December the first month with at least even odds of higher borrowing costs.
The Stoxx Europe 600 Index closed little changed for a second day, while a gauge of emerging-market equities climbed 0.5 percent. Apple suppliers advanced after Warren Buffett’s Berkshire Hathaway Inc. disclosed that it took a stake in the iPhone maker.
Futures on Asian indexes signaled declines, following a 1 percent jump in the MSCI Asia Pacific Index on Tuesday. Contracts on Japan’s Nikkei 225 Stock Average slipped at least 0.3 percent in Osaka and Chicago, while those on equity benchmarks in Sydney, Seoul and Hong Kong were down more than 0.4 percent in most recent trading.
Ten-year Treasuries advanced, while shorter-dated government debt fell, sending yields on two-year notes up by five basis points, or 0.05 percentage point, to 0.84 percent. The extra yield that 10-year debt offers over two-year notes shrank to the smallest since 2007 on a closing basis.
Ireland emerged as America’s fourth-largest creditor following China, Japan and the Cayman Islands after the U.S. government revised the way it reports the figures.
Petrobras is selling $5 billion five-year notes to yield 8.625 percent and $1.75 billion of 10-year notes to yield 9 percent, according to a person familiar with the transaction who asked not to be identified because the information is private. The oil producer said it would use proceeds from the sale to buy back as much as $3 billion in notes due in 2018.
Yields on Brazilian government debt due in a decade climbed by 15 basis points to 12.54 percent. Bonds have been sliding since Dilma Rousseff was forced to step down as president on May 12, with investors watching to see how acting president Michel Temer seeks to restore trust and revive the flailing Latin American economy.
The dollar touched a three-week high against the yen as data showing the cost of living in the U.S. climbed by the most in three years bolstered bets on Fed rate hikes this year.
“Investors are starting to pare back some of the negativity on the dollar,” said Omer Esiner, chief market analyst in Washington at Commonwealth Foreign Exchange Inc. “The dollar’s got some room to move higher here.”
The greenback rose 0.1 percent to 109.14 yen after reaching 109.65, its strongest level since April 28. The dollar was little changed at $1.1313 per euro.
The pound rallied the most in three weeks after a poll of U.K. voters released Monday showed people who support a campaign to remain in the European Union exceeded those saying they will vote to leave by a wider margin than in last month’s survey.
Oil rose to a seven-month high on speculation data Wednesday will show U.S. crude stockpiles declined last week, while falling supply in Canada and Nigeria eased anxiety over the global glut.
West Texas Intermediate crude for June delivery added 1.2 percent to $48.31 a barrel on the New York Mercantile Exchange, its highest close since Oct. 9. Prices are up 30 percent this year as concern over excess supply abates.
Gold gained for a third straight session as rising concern over China’s debt load boosted demand for the metal as a store of value. Miners including Barrick Gold Corp. rose after billionaire George Soros joined a slew of investors piling into bullion.
Soybean-meal futures climbed to a 17-month high in Chicago amid expectations supply from South American producers will drop over the northern-hemisphere summer, while demand from the U.S. increases.