GLOBAL MARKETS-Stagflation woes hit U.S. stocks; 2-yr Treasury yield jumps

BY Reuters | TREASURY | 10/12/21 04:53 PM EDT

By Koh Gui Qing

NEW YORK, Oct 12 (Reuters) - U.S. shares slipped on Tuesday in choppy trade, as investors waited for businesses to report how rising prices have hit their latest earnings, while bond yields spiked and the dollar shone on bets that monetary policy will soon be tightened.

Indeed, two U.S. Federal Reserve policymakers said on Tuesday that the central bank has kept pace with a planned move to reduce its bond buying program, cementing expectations that the Fed will start withdrawing its crisis-era stimulus as soon as next month.

Soaring oil prices largely held on to recent gains, while U.S. stock indices vacillated repeatedly between modest gains and losses before a flurry of third-quarter bank earnings reports from Wall Street on Wednesday and Thursday.

After watching oil prices steadily gallop higher in the past 18 months, many investors now worry that rising prices are exacerbating supply bottlenecks, weighing on businesses and crimping economic growth.

Coal prices are at a record peak, and while gas prices are off recent highs, they remain four times higher in Europe than at the start of the year.

The impact of supply crunches in power and manufacturing components is showing up in data - figures on Tuesday showed Japanese wholesale inflation hit 13-year highs last month, British shoppers slashed spending, China recorded a 20% drop in car sales, and bottlenecks dragged German economic sentiment down for a fifth month.

"We are in a sort of a holding pattern until we see the results," said Peter Kenny, founder of Kenny's Commentary LLC and Strategic Board Solutions LLC in New York.

"We are seeing some downgrades on U.S. growth, and the impact on businesses will be the thing to watch."

The Dow Jones Industrial Average fell 0.34%, the S&P 500 lost 0.24%, and the Nasdaq Composite dropped 0.14%.

The pan-European STOXX 600 index lost 0.07% and MSCI's gauge of stocks across the globe shed 0.31%.

Oil prices were mostly steady. U.S. crude was little changed at $80.50 per barrel, while Brent crude rose above $84 a barrel briefly before shedding 0.5% at $83.27.

With businesses hit by persistent supply chain disruptions and inflation pressures, the International Monetary Fund warned on Tuesday that the global economy's recovery from the COVID-19 pandemic is being constrained, and cut growth outlooks for the United States and other major industrial powers.

Given rising expectations that accelerating inflation will prompt central banks such as the Fed to rein in ultra-loose policies, benchmark bond yields rose in anticipation of tighter monetary conditions.

Two-year Treasury yields, which have climbed as much as 100 basis points in October along, jumped to 0.3419%, a level last seen in March 2020.

In keeping with concerns that soaring prices could crimp economic activity and prompt central banks to raise interest rates down the road, the yield curve flattened, and benchmark 10-year yields retreated to 1.5751%, from 1.605% late on Friday.

All those concerns, alongside rising Treasury yields, supported demand for the dollar. The dollar index stayed at one-year highs and stood near a three-year peak against the yen.

The dollar index rose 0.149%, and a stronger dollar nudged the euro down 0.27% to $1.1526. The Japanese yen weakened 0.31% versus the greenback to 113.62 per dollar.

Gold, usually seen as a hedge against inflation, shone on Tuesday despite dollar strength.

Spot gold added 0.3% to $1,759.85 an ounce. U.S. gold futures gained 0.34% to $1,760.60 an ounce.

(Reporting by Sujata Rao, additional reporting by Julie Zhu in Hong Kong; Editing by Rachel Armstrong, Alex Richardson, Jane Merriman, Nick Macfie and Jonathan Oatis)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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