By Herbert Lash and Elizabeth Howcroft
NEW YORK/LONDON (Reuters) -The dollar firmed and equity markets fell on Friday as the impact of rising interest rates on the economy unsettled investors amid a growing chorus of central bank officials insisting monetary policy needs to remain tight for some time.
U.S. mega-cap growth companies came under pressure and shares of ride-hailing firm Lyft Inc tumbled 35% after a downbeat forecast. In Europe, a dour outlook by Adidas added to the downbeat sentiment that higher interest rates gave investors.
But the tone was set by the sell-off in government debt. The yield on benchmark 10-year Treasury notes rose to the highest in more than a month and the 10-year German bund posted its biggest weekly rise of 2023 as European Central Bank policymakers warned about inflation. Yields move opposite price.
MSCI’s U.S. central index of stock market performance in 47 countries shed 0.42%, while the dollar index rose 0.41%.
“For all the enthusiasm or hopeful optimism that the (Federal Reserve) will be cutting rates by the end of the year, I’m skeptical that that’s going to happen,” said Michael Arone, chief investment strategist for the U.S. SPDR business at State Street Global Advisors in Boston.
“The economy, earnings and the labor market may suffer this year, but in anticipation of better days ahead, markets may be OK,” he said.
Broad disinflation has yet to start even if overall price growth has been in quick decline, ECB board member Isabel Schnabel said in a Twitter Q&A, the latest euro zone policymaker to say rates must rise further to combat inflation.
Fed officials said the same all week, as did policymakers in Australia, Sweden and Mexico as they, too, raised rates.
Michael James, managing director of equity trading at Wedbush Securities in Los Angeles, said the trend for stocks is still higher.
“Those with a longer-term view remain more bullish than you would expect from the Fed’s hawkishness. The market is betting against the Fed being as hawkish as they continue to sound,” he said.
The Dow Jones Industrial Average rose 0.42%, the S&P 500 gained 0.11% and the Nasdaq Composite dropped 0.7%.
The pan-European STOXX 600 index fell 0.96% as footwear maker Adidas warned of a potential loss this year for the first time in three decades. Shares lost 10.9%.
Futures now price the Fed’s target rate to peak at 5.153% in July and stay above 5% from May to November, with only a slight decline to 4.862% in December. Before this week rates were seen much lower and suggested a rate cut late this year.
U.S. monthly consumer prices rose in December instead of falling as previously estimated and data for the prior two months was also revised up, the Labor Department’s annual revisions of consumer price index (CPI) data showed.
The yen broadly strengthened after reports that the Japanese government was set to appoint academic Kazuo Ueda as the central bank’s next governor.
The Japanese yen strengthened 0.08% at 131.49 per dollar.
“The news surprised the market as he would bring a bit more of a hawkish tilt to monetary policy than the top contender, Masayoshi Amamiya,” ING said in a note to clients, adding that the market reaction could prove “temporary”.
In Europe, German government bond yields edged higher, with the 10-year bund at 2.363%.
The euro fell 0.59% to $1.0673.
Oil prices rose more than 2%, on track for weekly gains of more than 8%, as Russia announced plans to reduce crude production next month after the West imposed price caps on the country’s fuel output.
U.S. crude futures settled up $1.66 at $79.72 a barrel, while Brent rose $1.89 to settle at $86.39.
Gold inched higher while markets awaited next week’s U.S. inflation data that could influence the Fed’s rates policy.
U.S. gold futures for February delivery settled 0.2% lower at $1,874.50 per ounce.
(Reporting by Herbert Lash, additional eporting by Elizabeth Howcroft, Kevin Buckland; Editing by Kim Coghill, Arun Koyyur, Susan Fenton and Sharon Singleton)