Shares rise, U.S. Treasury yields drop as Fed minutes suggest slower rate hikes

BY Reuters | ECONOMIC | 11/22/22 09:00 PM EST

By Chibuike Oguh

NEW YORK (Reuters) -World equities rose while U.S. Treasury yields retreated on Wednesday after minutes of the Federal Reserve's latest policy meeting showed U.S. central bankers looking to soon moderate the pace of interest rate hikes.

A "substantial majority" of Fed policymakers agreed it would "likely soon be appropriate" to slow the pace of interest rate hikes, the meeting minutes showed. Traders had expected the Fed minutes would affirm officials' softening stance after recent data showed a moderation in economic conditions.

U.S. Labor Department data on Wednesday showed jobless claims increased more than expected last week. U.S. business activity contracted for a fifth month in November, according to the S&P Global flash U.S. Composite PMI Output Index.

"I didn't really think there were any surprises. They seem to still be pointing out that the risks of inflation are still high and recent data has been more persistent than they thought," said Jordan Kahn, chief investment officer at ACM Funds in Los Angeles.

"People are going to get excited when they see that some participants were mentioning the need to slow the pace of rate hikes. But the market was already pricing in a 50 basis point rate hike for December and the odds in the Fed futures market of a 50-basis point hike was already 70% going into this minutes," Kahn added.

The MSCI All Country stock index was up 0.85%, while European shares rose 0.6%.

U.S. Treasury yields traded lower after the Fed minutes. Benchmark 10-year notes were down to 3.6908% while the yields on two-year notes dropped to 4.4773%.

The yield curve that compares these two bonds was still in negative territory, at -76.30 basis points. When inverted, that part of the curve is seen as an indicator of an upcoming recession.

"The Fed has been hiking rates at 75 basis points and it was just unrealistic for them to continue at that pace," Kahn added.

On Wall Street, all three major indexes closed higher, led by gains in technology, consumer discretionary, communications, healthcare and industrial stocks.

The Dow Jones Industrial Average rose 0.28% to 34,194.06, the S&P 500 gained 0.59% to 4,027.26 and the Nasdaq Composite added 0.99% to 11,285.32.

Oil prices fell more than 3%, continuing a streak of volatile trading as the Group of Seven (G7) nations considered a price cap on Russian oil above the current market level and as gasoline inventories in the United States built by more than analysts' expected.

Brent futures for January delivery fell 3.3% to settle at $85.41 a barrel, while U.S. crude fell 4.36% to $77.42 per barrel.

The U.S. dollar fell across the board after the Fed minutes. The dollar index fell 0.915%, with the euro up 0.9% to $1.0395.

Gold prices climbed as the U.S. dollar fell. Spot gold added 0.5% to $1,749.40 an ounce, while U.S. gold futures gained 0.66% to $1,749.70 an ounce.

(Reporting by Chibuike Oguh in New York; Editing by Bernadette Baum, Will Dunham and David Gregorio)

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.

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